-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AnLwUNlxN+iplPB89A8I3ElEA24b4aQ8wCZrdrv70oXDRwSFsFqKnsbtuZ/KyjSy 5UxY8RXlfArDNQA6FtamBA== 0000950133-97-001092.txt : 19970329 0000950133-97-001092.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950133-97-001092 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN MANAGEMENT SYSTEMS INC CENTRAL INDEX KEY: 0000310624 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 540856778 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-09233 FILM NUMBER: 97567693 BUSINESS ADDRESS: STREET 1: 4050 LEGATO RD CITY: FAIRFAX STATE: VA ZIP: 22033 BUSINESS PHONE: 7032678000 10-K405 1 AMERICAN MANAGEMENT SYSTEMS FORM 10-K. 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) State of Incorporation: Delaware I.R.S. Employer 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 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. 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 3 CONTENTS
Page ---- 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
ii 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 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 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 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 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 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 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 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 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 13 Schedule II VALUATION AND QUALIFYING ACCOUNTS (In millions)
1996 1995 1994 - --------------------------------------------------------------------------------------------------------------- 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 ====== ==== ====
10 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.
Signature Title Date --------- ------------------------- ------------------------ (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
11 15
Signature Title Date --------- ------------------------- ----------------- 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
12 16 EXHIBIT INDEX
Exhibit Number Description ------ ----------- 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
- ------------------- * Previously filed. 13 EX-11 2 COMPUTATION. 1 Exhibit 11 COMPUTATION OF NET INCOME PER COMMON SHARE (In thousands except per share data)
Year Ended December 31 1996 1995 1994 --------------------------------------------------------------------------------------------------------- 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 ======= ======= =======
14 EX-13 3 FINANCIAL REPORT. 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 2 Exhibit 13 AMERICAN MANAGEMENT SYSTEMS, INCORPORATED 1996 FINANCIAL REPORT CONTENTS - -------------------------------------------------------------------------------- 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
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 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 5 FINANCIAL STATEMENTS AND NOTES American Management Systems, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31 (In millions except per share data) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- 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 ====== ====== ======
- ---------------- See Accompanying Notes to Consolidated Financial Statements. 3 6 American Management Systems, Inc. CONSOLIDATED BALANCE SHEETS
December 31 (In millions except per share data) 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- ASSETS - --------------------------------------------------------------------------------------------------------------------------- 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 ====== ======
- ---------------- See Accompanying Notes to Consolidated Financial Statements. 4 7 American Management Systems, Inc. CONSOLIDATED BALANCE SHEETS
December 31 (In millions except per share data) 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------------------------------------------------- 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 ======= =======
- ---------------- See Accompanying Notes to Consolidated Financial Statements. 5 8 American Management Systems, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 (In millions) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- 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
- ---------------- See Accompanying Notes to Consolidated Financial Statements. 6 9 American Management Systems, Inc. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In millions)
Common Stock Capital in Currency Total (Par Value Excess of Translation Retained Treasury Stockholders' $0.01) Par Value Adjustment Earnings Stock Equity - ------------------------------------------------------------------------------------------------------------------------------- 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 ==== ===== ===== ====== ====== ======
- ---------------- See Accompanying Notes to Consolidated Financial Statements. 7 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 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 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
December 31 (In millions) 1996 1995 - ------------------------------------------------------------------------------------------------------- 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 ====== ======
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 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 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.
December 31 (In millions) 1996 1995 - ---------------------------------------------------------------------------------------------------------- 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 ===== =====
Interest paid by the Company totaled $3.2 million in 1996, $2.3 million in 1995, and $1.4 million in 1994. 12 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 16 Additional information with respect to stock options awarded pursuant to such plans is summarized in the following schedule.
Number of Option Exercise Price Shares per Share - ------------------------------------------------------------------------------------------------------------------- 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
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 17 NOTE 6 -- INCOME TAXES
Year Ended December 31 (In millions) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- 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 ======= ======= =======
The Company paid income taxes of approximately $14.3 million, $16.4 million, and $9.1 million, in 1996, 1995, and 1994, respectively. 15 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 19 Gross Rentals and Maintenance Payments
Net Rentals and Sublease Maintenance (In millions) Real Property Equipment Total Income Payments - -------------------------------------------------------------------------------------------------------------------- 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 ======= ==== ====== ==== ======
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 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.
Year Ended December 31 (In millions) 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------- 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 ====== ====== ======
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:
Year Ended December 31 (In millions) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- 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% ====== ====== =====
18 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 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.
Period-to-Period Percentage of Total Revenues Change ---------------------------- ---------------- 1996 1995 vs. vs. 1996 1995 1994 1995 1994 - ---------------------------------------------------------------------------------------------------------------- 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
20 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 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 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 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 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 28 FIVE-YEAR FINANCIAL SUMMARY
Year Ended December 31 (In millions except share and per share data) 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS - -------------------------------------------------------------------------------------------------------------------------- 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
- ------------------------ (1) In 1992, the Company adopted FAS 109 -- Accounting for Income Taxes. 26 29 FIVE-YEAR REVENUES BY TARGET MARKET
Year Ended December 31 (In millions)(1) 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------------- 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 ====== ====== ====== ====== ======
- ------------------------ (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 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)
Net Income to Net Income Stock Bid Price Income Before Common per Common --------------- Revenues Income Taxes Shareholder Share High Low - ------------------------------------------------------------------------------------------------------------------------- 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
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 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 EX-21 4 SUBSIDIARIES. 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.
Place of Subsidiary (Year Organized or Acquired) Incorporation -------------------------------------- ------------- 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
EX-23 5 CONSENT. 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 EX-27 6 FDS.
5 1,000 YEAR DEC-31-1996 DEC-31-1996 62,800 0 247,700 18,900 0 323,800 91,100 (43,100) 424,200 198,800 0 0 0 500 203,100 424,200 812,200 812,200 525,900 784,600 1,400 15,200 3,200 26,200 10,700 15,500 0 0 0 15,500 0.37 0.37
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