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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
OR
----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From: To:
---------- -----------
Commission File No.: 0-9233
AMERICAN MANAGEMENT SYSTEMS, INCORPORATED
(Exact name of registrant as specified in its charter)
State or other Jurisdiction of I.R.S. Employer
Incorporation or Organization: Delaware Identification No.: 54-0856778
4050 Legato Road
Fairfax, Virginia 22033
(Address of principal executive office)
Registrant's Telephone No., Including Area Code: (703) 267-8000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
As of May 9, 1997, 41,363,026 shares of common stock were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Pursuant to Form 10-Q General Instruction D(1), in response to item
2 of Part I of this Form 10-Q, registrant hereby incorporates by reference the
section entitled, "Assumptions Underlying Certain Forward-Looking Statements and
Factors That May Affect Future Results," which is contained in Exhibit 13 to the
registrant's Annual Report on Form 10-K for its fiscal year ended December 31,
1996 (File No. 0-9233), filed with the Securities and Exchange Commission on
March 28, 1997.
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CONTENTS
Page
----
Part I Financial Information
---------------------
Item 1. Financial Statements.............................................................. 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................... 7
Part II Other Information
-----------------
Item 1. Legal Proceedings................................................................. 12
Item 2. Changes in Securities............................................................. 12
Item 3. Defaults Upon Senior Securities................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders............................... 12
Item 5. Other Information................................................................. 12
Item 6. Exhibits and Reports on Form 8-K.................................................. 12
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
The information furnished in the accompanying Consolidated Statements
of Operations, Consolidated Revenues by Market, Consolidated Balance Sheets, and
Consolidated Statements of Cash Flows reflects all adjustments which are, in the
opinion of management, necessary for a fair statement of the results of
operations and financial condition for the interim periods. The accompanying
financial statements and notes thereto should be read in conjunction with the
financial statements and notes for the year ended December 31, 1996, included in
the American Management Systems, Incorporated (the "Company" or "AMS") Annual
Report on Form 10-K (File No. 0-9233) filed with the Securities and Exchange
Commission on March 28, 1997.
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American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In millions except per share data)
For the Quarter
Ended March 31,
1997 1996
---------- --------
REVENUES............................................................................ $196.3 $181.4
EXPENSES
Client Project Expenses...................................................... 113.4 109.5
Other Operating Expenses..................................................... 60.7 49.6
Corporate Expenses........................................................... 12.2 10.8
------ ------
186.3 169.9
INCOME FROM OPERATIONS.............................................................. 10.0 11.5
OTHER (INCOME) EXPENSE
Interest Expense............................................................. 1.3 0.7
Other (Income) Expense....................................................... (1.0) (0.5)
------ ------
0.3 0.2
INCOME BEFORE INCOME TAXES.......................................................... 9.7 11.3
INCOME TAXES........................................................................ 4.0 4.7
------ ------
NET INCOME.......................................................................... $ 5.7 $ 6.6
====== ======
WEIGHTED AVERAGE SHARES AND EQUIVALENTS............................................. 42.1 41.7
====== ======
NET INCOME PER SHARE................................................................ $ 0.14 $ 0.16
====== ======
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American Management Systems, Incorporated
CONSOLIDATED REVENUES BY MARKET
Unaudited
(In millions)
For the Quarter
Ended March 31,
1997 1996
------------ --------
Telecommunications Firms..................................................... $ 58.9 $ 68.5
Financial Services Institutions.............................................. 51.8 41.0
State and Local Governments and Education.................................... 34.3 31.1
Federal Government Agencies.................................................. 40.6 29.4
Other Corporate Clients...................................................... 10.7 11.4
------ ------
Total Revenues............................................................... $196.3 $181.4
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American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
(In millions except per share data)
3/31/97
ASSETS (Unaudited) 12/31/96
----------- --------
CURRENT ASSETS
Cash and Cash Equivalents.................................................. $ 30.5 $ 62.8
Accounts and Notes Receivable.............................................. 250.4 247.7
Prepaid Expenses and Other Current Assets.................................. 13.4 13.3
------ ------
294.3 323.8
FIXED ASSETS
Equipment.................................................................. 64.6 62.0
Furniture and Fixtures..................................................... 18.7 18.4
Leasehold Improvements..................................................... 11.0 10.7
------ ------
94.3 91.1
Accumulated Depreciation and Amortization (46.9) (43.1)
------ ------
47.4 48.0
OTHER ASSETS
Purchased and Developed Computer Software (Net of Accumulated
Amortization of $54,400,000 and $50,500,000)............................. 42.4 40.2
Intangibles (Net of Accumulated Amortization of $2,700,000 and
$2,600,000).............................................................. 6.5 6.3
Other Assets (Net of Accumulated Amortization of $700,000 and
$15,700,000)............................................................. 4.4 5.9
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53.3 52.4
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TOTAL ASSETS .................................................................. $395.0 $424.2
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American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
(In millions except per share data)
3/31/97
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 12/31/96
----------- ---------
CURRENT LIABILITIES
Notes Payable and Capitalized Lease Obligations............................ $ 55.6 $ 53.5
Accounts Payable........................................................... 10.4 19.6
Accrued Incentive Compensation............................................. - 36.1
Other Accrued Compensation and Related Items............................... 26.9 32.3
Deferred Revenues.......................................................... 20.1 20.6
Other Accrued Liabilities.................................................. 2.4 2.7
Provision for Contract Losses.............................................. 7.1 18.5
Income Taxes Payable....................................................... 3.7 7.8
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126.2 191.1
Deferred Income Taxes...................................................... 11.3 7.7
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137.5 198.8
NONCURRENT LIABILITIES
Notes Payable and Capitalized Lease Obligations............................ 32.0 13.7
Other Accrued Liabilities.................................................. 7.7 1.4
Deferred Income Taxes...................................................... 7.3 7.2
------ ------
47.0 22.3
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TOTAL LIABILITIES................................................................. 184.5 221.1
STOCKHOLDERS' EQUITY
Preferred Stock ($0.10 Par Value; 4,000,000 Shares Authorized,
None Issued or Outstanding)
Common Stock ($0.01 Par Value; 100,000,000 Shares Authorized, 49,898,649
and 49,598,673 Issued and 41,329,585 and 40,939,209
Outstanding)............................................................. 0.5 0.5
Capital in Excess of Par Value............................................. 77.0 75.0
Retained Earnings.......................................................... 163.0 157.3
Currency Translation Adjustment............................................ (3.7) (1.1)
Common Stock in Treasury, at Cost (8,569,064 and 8,659,464 Shares)......... (26.3) (28.6)
------ ------
210.5 203.1
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................ $395.0 $424.2
====== ======
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American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In millions)
For the Quarter
Ended March 31,
1997 1996
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income....................................................................... $ 5.7 $ 6.6
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:
Depreciation and Amortization................................................ 8.7 12.6
Deferred Income Taxes........................................................ 3.5 2.5
Provision for Doubtful Accounts.............................................. 0.8 0.5
Changes in Assets and Liabilities:
Increase in Trade Receivables........................................... (3.6) (20.4)
Increase in Prepaid Expenses and Other Current Assets................... (0.1) (1.6)
Decrease (Increase) in Other Assets..................................... 0.8 (2.9)
Decrease in Accrued Incentive Compensation.............................. (33.8) (16.4)
(Decrease) Increase in Accounts Payable, Other Accrued
Compensation, and Other Accrued Liabilities........................... (19.9) 4.6
(Decrease) Increase in Deferred Revenue................................. (0.4) 3.0
Decrease in Income Taxes Payable........................................ (4.1) (1.1)
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Net Cash Used by Operating Activities........................................ (42.4) (12.6)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets......................................................... (4.7) (4.2)
Purchase of Computer Software and Investment in Software Products................ (6.0) (3.4)
Decrease in Other Investments.................................................... 0.3 0.3
Proceeds from Sale of Fixed Assets and Purchased Computer Software............... 0.7 0.1
------ ------
Net Cash Used by Investing Activities........................................ (9.7) (7.2)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings....................................................................... 22.2 6.3
Payments on Borrowings........................................................... (1.7) (1.7)
Proceeds from Common Stock Options Exercised..................................... 2.0 2.9
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Net Cash Provided by Financing Activities.................................... 22.5 7.5
Increase in Currency Translation Adjustment...................................... (2.7) (0.3)
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NET DECREASE IN CASH AND CASH EQUIVALENTS.......................................... (32.3) (12.6)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................... 62.8 35.8
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CASH AND CASH EQUIVALENTS AT END OF PERIOD......................................... $ 30.5 $ 23.2
====== ======
NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES:
Treasury Stock Utilized to Satisfy Accrued Incentive Compensation
Liabilities.................................................................... $ 2.3 $ 3.4
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the
percentage of revenues of major items in the Consolidated Statements of
Operations and the percentage of change in such items from period to period,
excluding percentage changes in de minimus dollar amounts.
Percentage of Period-to-Period
Total Revenues Change
-------------- ----------------
Quarter Ended Quarter Ended
March 31, March 31, 1997
vs.
1997 1996 March 31, 1996
---------- ---------- --------------
Revenues................................................... 100.0% 100.0% 8.2%
Expenses
Client Project Expenses............................... 57.8 60.4 3.5
Other Operating Expenses.............................. 30.9 27.3 22.4
Corporate Expenses.................................... 6.2 6.0 13.0
----- -----
Total................................................. 94.9 93.7 9.7
Income from Operations..................................... 5.1 6.3 (13.0)
Other (Income) Expense..................................... 0.2 0.1
Income Before Income Taxes................................. 4.9 6.2 (14.2)
Income Taxes............................................... 2.0 2.6 (14.9)
Net Income................................................. 2.9 3.6 (13.6)
Weighted Average Shares and Equivalents.................... - - 1.0
Net Income per Share....................................... - - (12.5)
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RESULTS OF OPERATIONS (continued)
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") contains certain forward-looking statements. In addition,
the Company or its representatives from time to time may make, or may have made,
certain forward-looking statements, orally or in writing, including, without
limitation, any such statements made in 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.
REVENUES
Beginning with this first quarter 1997 Form 10-Q, this section of the 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.
Revenues increased 8% during the first quarter of 1997, compared to the
first quarter of 1996, with growth occurring in all of the Company's target
markets, except the Telecommunications Firms market.
Business with non-US clients decreased 6% (to $60.0 million) during the
first quarter of 1997, compared to the same 1996 period. The decrease was
primarily due to the suspension of work on a non-US telecommunications systems
project, as previously discussed in the Form 10-K filed with the SEC on March
28, 1997. All other business with non-US clients increased 20% during the first
quarter of 1997.
In the Telecommunications Firms market, revenues decreased 14%, compared to
the 1996 quarter, owing to the above-cited suspension. Revenues from all other
telecommunication clients increased 8%, compared to the first quarter of 1996.
Non-US revenues in this market declined 17%; excluding the effects of the
suspended portion of the non-US contract, non-US revenues in this market
increased 15%. Business in this market is characterized by very large projects,
with relatively few clients. For all of 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; the Company is continuing work however on one release of the
major non-US systems project, another portion of which was suspended by the
client as referred to above.
In the Financial Services Institutions target market, 1997 revenues in the
first quarter increased 26% over the comparable 1996 period, owing principally
to build-ups in business with clients who started large projects in 1996.
Business with non-US clients accounted for approximately 29% of the revenues in
this market ($52 million). For all of 1997, the Company expects revenue growth
in this market to increase at rates slightly below the Company's overall revenue
growth.
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In the State and Local Governments and Education target market,
revenues increased 10% during the first quarter of 1997. The 1997
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.
The Company expects 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 revenues.
Revenues in the Federal Government Agencies target market increased 38%
during the first quarter of 1997, compared to the first quarter of 1996. This
increase was attributable equally to increased business with existing clients
and new business with both defense and civilian agencies. The Company expects
revenues in this target market, for all of 1997, to increase at rates greater
than the overall growth rate of the Company, owing in part to award of a
significant contract with the Department of Defense.
Revenues from Other Corporate Clients decreased 6% during the quarter,
compared to 1996. Revenues from this market, which includes business in two
smaller vertical markets, the health care market and the electric and gas
utilities market, for all of 1997, is expected to increase at rates exceeding
the Company's overall growth in revenues.
EXPENSES
Client project expenses and other operating expenses together increased
9% during the first quarter of 1997, generally in line with the revenue growth
rate. For all of 1997, the Company anticipates that these expenses will continue
to grow in proportion to 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.
Corporate Expenses increased 13% for the quarter when comparing the two
first quarter periods. While some expenses, such as corporate-sponsored
recruiting, training, and technology increased at rates greater than the
increase in revenues, other expenses, such as corporate management, corporate
level performance-based incentive compensation, and other corporate activities,
grew slower than did revenues.
INCOME FROM OPERATIONS
Income from operations decreased 13% for the first quarter of 1997. A
principal factor in the decrease was the significant amount of management and
staff resources that have been consumed in attempting to resolve the issues with
the non-US telecommuncations client project, and the reduced levels of revenues
that these resources would otherwise have generated. Also, contributing to the
decrease quarter-to-quarter were increases in the Company's recruiting costs.
For the above-cited reasons, the Company expects profit margins, in the first
half of 1997, to be significantly below the Company's profit margins for the
first half of 1996.
OTHER (INCOME) EXPENSE
Interest expense increased 86% during the first quarter of 1997,
because of additional long-term debt incurred by the Company during the first
quarter 1997 and significant increases in short-term borrowing to finance the
growth of the Company. Other income increased 100% in the first quarter 1997,
compared to 1996, due primarily to a refund of property taxes.
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FOREIGN CURRENCY EXCHANGE
Approximately 31% of the Company's first quarter revenues were derived
from non-US business. The Company's practice is to negotiate contracts in the
same currency in which the predominant expenses are incurred, thereby mitigating
the exposure to foreign currency exchange fluctuations. It is not possible to
accomplish this in all cases, and the Company does take some risk that profits
and stockholder's equity will be affected by foreign currency exchange
fluctuations. However, these risks are mitigated to the extent the Company: 1)
successfully negotiates short-term contracts (one year or less), or 2)
negotiates provisions that allow pricing adjustments related to currency
fluctuations. To date, the Company has not engaged in any hedging activities
relating to foreign currency exchange fluctuations.
LIQUIDITY AND CAPITAL RESOURCES
The Company provides for its operating cash requirements primarily
through funds generated from operations, and 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 March
31, 1997, the Company's cash and cash equivalents totaled $30.5 million, down
from $62.8 million at the end of 1996. Cash used in operating activities was
$42.4 million, due primarily to payments made in the first quarter for incentive
compensation and other employee benefits, and to a lesser extent, 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. The Company
expects to receive all funds due from these clients.
The Company invested over $9.7 million in fixed assets and software
purchases, and computer software development during the first quarter of 1997.
Revolving line of credit borrowings increased by $2.2 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 March 31,
1997. Additionally, the Company borrowed $20 million under the term loan
provisions of its new $100 million syndicated debt facility. During the first
quarter, the Company made approximately $1.7 million in installment payments of
principal on outstanding debt owed to banks; the Company also received
approximately $2.0 million during the period from the exercise of stock options.
At March 31, 1997, the Company's debt-equity ratio, as measured by
total liabilities divided by stockholders' equity, was 0.88, down from 1.09
at December 31, 1996.
The Company's material unused source of liquidity at the end of the
first quarter 1997 consisted of approximately $31 million under the new
revolving credit facility. The Company believes that its liquidity needs can be
met from the various sources described above.
NEW ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings per Share", was issued by the Financial Accounting Standards Board in
February 1997. The effective date of SFAS No. 128 is for periods ending after
December 15, 1997 and early adoption is not permitted. The Company will
implement SFAS No. 128 during the quarter and year ended December 31, 1997 and
management does not expect this pronouncement to have a material impact on
Earnings per Share.
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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 the first quarter of 1997.
The Company faces continuing risks in the area of project delivery and
staffing. AMS has established a reputation in the marketplace of being a firm
which delivers on time and in accordance with specifications regardless of the
complexity of the application and the technology. The Company's customers often
have a great deal at stake in being able to meet market and regulatory demands,
and demand very ambitious terms and delivery schedules. In order to meet its
contractual commitments, AMS must continue to be able to successfully recruit,
train, and assimilate large numbers of entry-level and experienced employees
annually, as well as to provide sufficient senior managerial experience on
engagements, especially on large, complex projects. Moreover, this staff must
be re-deployed on projects throughout North America, Europe, and other
locations.
There is also the risk of successfully managing large projects and the
risk of a material impact on results because of the unanticipated delay,
suspension, renegotiation or cancellation of a large project. Any such
development in a project could result in a drop in revenues or profits, the need
to relocate staff, a potential dispute with a client regarding money owed, and a
diminution of AMS's reputation. These risks are magnified in the largest
projects and markets simply because of their size. The Company's business is
characterized by large contracts producing high percentages of the Company's
revenues. For example, 34% of the Company's total revenues in 1996 were derived
from business with ten clients. Events such as unanticipated declines in
revenues or profits could in turn result in immediate fluctuations in the
trading price and volume of the Company's stock.
Certain other risks, including, but not limited to, the Company's
increasing international scope of operations, are discussed elsewhere in this
Form 10-Q. Because the Company operates in a rapidly changing and highly
competitive market, additional risks not discussed in this Form 10-Q may emerge
from time to time. The Company cannot predict such risks or assess the impact,
if any, such risks may have on its business. Consequently, the Company's various
forward-looking statements, made, or to be made, should not be relied upon as a
prediction of actual results.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
NONE.
Item 2. Changes in Securities
NONE.
Item 3. Defaults Upon Senior Securities
NONE.
Item 4. Submission of Matters to a Vote of Security Holders
NONE.
Item 5. Other Information
NONE.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.3 $100,000,000 Multi-Currency Revolving Credit and
Term Loan Agreement among AMS, subsidiaries of AMS,
the bank lenders party thereto, and Wachovia Bank of
Georgia, N.A. and NationsBank, N.A. as agents, dated
December 24, 1996.
(b) Reports on Form 8-K
NONE.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN MANAGEMENT SYSTEMS, INCORPORATED
Date: May 15, 1997 /s/ Philip M. Giuntini
---------------------- -----------------------------------------
Philip M. Giuntini, President
Date: May 15, 1997 /s/ James E. Marshall
---------------------- -----------------------------------------
James E. Marshall, Controller
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