PAGE <1>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1993 Commission file number 0-10175
POLICY MANAGEMENT SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
South Carolina 57-0723125
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
One PMS Center (P.O. Box Ten)
Blythewood, S.C. (Columbia, S.C.) 29016 (29202)
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (803) 735-4000
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 No X
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
22,637,021 Common shares, $.01 par value, as of March 11, 1994
PAGE <2>
POLICY MANAGEMENT SYSTEMS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Operations for
the nine months and three months ended
September 30, 1993 and 1992................. 3
Consolidated Balance Sheets as of
September 30, 1993 and December 31, 1992.... 4
Consolidated Statements of Cash Flows for
the nine months ended
September 30, 1993 and 1992................. 5
Notes to Consolidated Financial Statements.... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................. 19
Item 6. Exhibits and Reports on Form 8-K.............. 19
Signatures................................................... 20
INTRODUCTORY NOTE
THE INFORMATION CONTAINED HEREIN HAS BEEN RESTATED IN NOVEMBER
1994 TO REFLECT ADJUSTMENTS RESULTING FROM SPECIAL AUDITS OF THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS (SEE NOTE 2 OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS). UNLESS OTHERWISE STATED,
HOWEVER, INFORMATION CONTAINED HEREIN IS AS OF SEPTEMBER 30, 1993.
PAGE <3>
PART I
FINANCIAL INFORMATION
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Three Months
Ended September 30, Ended September 30,
1993 1992 1993 1992
(Restated) (Restated)
(In Thousands, Except Per Share Data)
Revenues:
Licensing...................... $ 58,621 $ 52,009 $ 15,666 $ 16,317
Services....................... 286,187 310,764 93,219 107,769
344,808 362,773 108,885 124,086
Costs and Expenses:
Employee compensation
and benefits................. 126,293 126,486 42,038 42,883
Computer and communications
expense...................... 31,016 29,662 10,095 9,917
Information services and data
acquisition costs............ 96,300 70,204 34,281 24,746
Other operating costs
and expenses................. 91,862 77,637 21,719 25,691
Impairment and restructuring
charges...................... 80,733 - - -
426,204 303,989 108,133 103,237
Operating income (loss).......... (81,396) 58,784 752 20,849
Other Income and Expenses:
Investment income.............. 7,941 9,087 2,237 3,045
Gain on sale of
marketable securities........ 3,052 804 19 472
Interest expense and other
charges...................... (1,719) (1,046) (923) (305)
9,274 8,845 1,333 3,212
Income (loss) before income
taxes (benefit)................ (72,122) 67,629 2,085 24,061
Income taxes (benefit)........... (12,045) 22,161 1,739 7,918
Net income (loss)................ $(60,077) $ 45,468 $ 346 $ 16,143
Net income (loss) per share...... $( 2.62) $ 1.96 $ .02 $ .69
Weighted average number of
shares......................... 22,933 23,174 22,604 23,245
See accompanying notes.
PAGE <4>
<TABLE>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31,
1993 1992
(Unaudited) (As Restated)
(In Thousands,
Except Share Data)
<S> <C> <C>
Assets
Current assets:
Cash and equivalents..................................................... $ 31,292 $ 31,959
Marketable securities.................................................... 123,124 206,562
Receivables, net of allowance for uncollectible amounts
of $1,597 ($1,630 at 1992)............................................ 90,119 86,479
Income tax receivable.................................................... 10,232 2,891
Deferred income taxes.................................................... 6,742 8,083
Other.................................................................... 10,551 7,939
Total current assets.................................................. 272,060 343,913
Property and equipment, at cost less accumulated depreciation
and amortization of $95,412 ($83,730 at 1992)......................... 139,217 131,696
Receivables................................................................ 5,257 22,252
Goodwill and other intangible assets....................................... 87,650 100,792
Capitalized software costs................................................. 110,697 99,414
Deferred income taxes...................................................... 10,836 2,580
Other...................................................................... 3,128 6,295
Total assets.......................................................... $628,845 $706,942
Liabilities
Current liabilities:
Accounts payable and accrued expenses.................................... $ 44,899 $ 37,022
Accrued restructuring and lease termination costs........................ 10,090 -
Accrued contract termination costs....................................... 5,380 4,008
Current portion of long-term debt........................................ 4,515 3,670
Income taxes payable..................................................... 1,693 -
Unearned revenues........................................................ 11,763 11,500
Other.................................................................... 1,161 1,026
Total current liabilities............................................. 79,501 57,226
Long-term debt............................................................. 5,496 6,001
Deferred income taxes...................................................... 49,730 56,112
Accrued restructuring and lease termination costs.......................... 19,417 -
Other...................................................................... 2,521 8,527
Total liabilities..................................................... 156,665 127,866
Commitments and contingencies (Note 5)
Stockholders' Equity
Special stock, $.01 par value, 5,000,000 shares authorized................. - -
Common stock, $.01 par value, 75,000,000 shares authorized,
22,617,353 shares issued and outstanding (23,524,197 at 1992)........... 226 235
Additional paid-in capital................................................. 261,635 307,906
Retained earnings.......................................................... 212,689 272,766
Foreign currency translation adjustment.................................... (2,370) (1,831)
Total stockholders' equity............................................ 472,180 579,076
Total liabilities and stockholders' equity......................... $628,845 $706,942
<FN>
See accompanying notes.
</TABLE>
PAGE <5>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
1993 1992
(Restated)
Operating Activities (In Thousands)
Net income/(loss).................................. $(60,077) $ 45,468
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization.................... 47,214 39,386
Deferred income taxes............................ (20,763) 4,515
Gain on sale of marketable securities............ (3,053) (804)
Provision for uncollectible accounts............. 1,500 352
Impairment charges............................... 54,890 -
Changes in assets and liabilities:
Restructuring charges............................ 25,843 -
Receivables...................................... 21,344 (4,112)
Income tax receivable............................ (7,341) (5,448)
Accounts payable and accrued expenses............ 1,822 5,503
Income taxes payable............................. 3,009 2,143
Other, net......................................... (3,848) (1,873)
Cash provided by operations................... 60,540 85,130
Investing Activities
Proceeds from sales/maturities of marketable
securities, net................................... 364,443 89,663
Purchases of marketable securities, net............ (269,112) (123,654)
Acquisition of property and equipment.............. (35,242) (40,199)
Capitalized internal software development costs.... (17,591) (18,400)
Purchased software................................. (3,928) (2,242)
Proceeds from disposal of property and
equipment......................................... 9,123 212
Business acquisitions.............................. (59,097) (2,194)
Cash used for investing activities............ (11,404) (96,814)
Financing Activities
Payments on long-term debt......................... (3,680) (64)
Issuance of common stock under stock
option plans...................................... 690 9,048
Issuance of common stock to employee
benefit plan...................................... 1,328 -
Repurchase of outstanding common stock............. (48,660) -
Cash provided (used) by financing activities.. (50,322) 8,984
Effect of exchange rate changes on cash.............. 519 -
Net decrease in cash and equivalents................. (667) (2,700)
Cash and equivalents at beginning of period.......... 31,959 39,609
Cash and equivalents at end of period................ $ 31,292 $ 36,909
Noncash Activities
Long-term debt arising from and assumed in
connection with business acquisition.............. $ 4,187 $ 2,187
Supplemental Information
Interest paid...................................... 1,037 313
Income taxes paid.................................. 12,158 21,091
See accompanying notes.
PAGE <6>
POLICY MANAGEMENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1993
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements are prepared on the
basis of generally accepted accounting principles and include the
accounts of the Company and its subsidiaries, all of which are
wholly-owned. All material intercompany balances and transactions
have been eliminated. Certain amounts previously presented in the
consolidated financial statements for prior periods have been
reclassified to conform to current classifications.
The consolidated balance sheet as of December 31, 1992 has
been audited and is restated herein. The consolidated statements
of operations and cash flows for the three and nine months ended
September 30, 1993 and 1992 have been restated by the Company,
without audit, to conform to the adjustments to the Company's
retained earnings as of December 31, 1992, as discussed in Note 2.
These adjustments include all adjustments which are, in the opinion
of management, necessary to state fairly the results for the
periods presented.
NOTE 2. RESTATEMENT OF RESULTS OF OPERATIONS
In August 1993, the Company engaged independent accountants to
conduct a special audit of the Company's balance sheet as of
December 31, 1992 and its consolidated financial statements as of
and for the six months ended June 30, 1993. As a result of this
audit, the Company determined that retained earnings previously
reported as of December 31, 1992 required adjustment. These
adjustments were due to errors in the application of accounting
principles and subsequent discovery of facts existing at February
26, 1993, the date of the predecessor auditor's report (see Note 2
of Notes to Consolidated Financial Statements in the Company's
Annual Report on Form 10-K for the year ended December 31, 1993).
In February 1994, the Company engaged independent accountants
to audit the Company's consolidated financial statements as of and
for the twelve months ended December 31, 1993 and 1992.
As a result of the audit of the Company's consolidated
financial statements as of and for the twelve months ended December
31, 1993 and 1992, the Company determined the specific prior period
or periods affected by the above adjustments. The components (net
of related tax effects) of the adjustment to previously reported
PAGE <7>
net income for the three and nine months ended September 30, 1992,
are as follows:
Increase (Decrease) to Net Income
Three Months Nine Months
Ended September 30, Ended September 30,
1992 1992
(In Thousands)
Elimination of revenue related to a
contingent contract that was cancelled... $(606) $ (606)
Deferral of revenues due to changes in
timing of revenue recognition............ 940 155
Reduction of expenses due to
capitalization of certain software
costs.................................... 759 1,304
Recognition of expenses due to changes in
timing of expense accrual................ (445) 386
Reserve for losses on certain services
contracts................................ (215) (605)
Reduction of current income tax
liability due to previously
unrecorded tax credits................... 542 1,556
Net income adjustment...................... $ 975 $2,190
After giving effect to these adjustments, the principle
elements of the Company's consolidated statements of operations for
the three and nine months ended September 30, 1992 were restated as
follows:
Three Months Ended Nine Months Ended
September 30, 1992 September 30, 1992
(As Previously (As Previously
Reported) (Restated) Reported) (Restated)
(In Thousands)
Revenues.....................$126,371 $124,086 $365,568 $362,773
Operating income............. 20,147 20,849 57,797 58,784
Other income and
expenses, net.............. 3,215 3,212 8,808 8,845
Income before income taxes... 23,362 24,061 66,605 67,629
Net income................... 15,168 16,143 43,278 45,468
Net income per share......... .65 .69 1.87 1.96
Deferral of revenues due to changes in timing of revenue
recognition includes situations where (i) there were errors in
accounting for contracts under the percentage of completion method;
(ii) there were delays in receiving signed contracts; (iii)
customers prepaid or were billed for services performed in
subsequent periods or where refunds or provisions for credit were
contractually required and (iv) the Company had future delivery
obligations under certain contracts.
PAGE <8>
NOTE 3. ACQUISITION
On August 24, 1993, the Company consummated the acquisition of
all of the outstanding stock of CYBERTEK Corporation ("CYBERTEK")
of Dallas, Texas for an aggregate consideration of $59,727,000 in
cash. CYBERTEK has over 20 years of experience in serving the data
processing needs of the life insurance industry by designing and
delivering a combination of data processing services, consulting
services and software.
The acquisition has been recorded using the purchase method of
accounting. Accordingly, the unaudited consolidated statements of
operations of the Company for the three months and nine months
ended September 30, 1993 include the results of operations of
CYBERTEK only from the date of acquisition. The cost of
acquisition was determined, and assigned to assets acquired, as
follows:
(In Thousands)
Total consideration paid................. $58,152
Direct costs of acquisition.............. 1,575
Total cost to be assigned to net
assets acquired........................ 59,727
Add - Liabilities assumed................ 13,876
Less - Cost assigned to tangible and
identifiable intangible assets
acquired (including $10,623
purchased software cost)............... 47,338
Cost assigned to goodwill................ $26,265
NOTE 4. CONTINGENCIES
In April 1993, litigation was commenced against the Company
and certain of its present and former officers and directors in the
United States District Court for the District of South Carolina,
Columbia Division. In the litigation, which purports to be a class
action on behalf of purchasers of the Company's common stock
between March 18, 1992 and July 8, 1993, the plaintiffs allege that
the Company failed to prepare its financial statements in
accordance with generally accepted accounting principles and
omitted to disclose certain information regarding, among other
things, its business and prospects in violation of the Federal
securities laws, the South Carolina Code and common law. The
Company believes it has meritorious defenses to the claims and is
vigorously defending the litigation. The plaintiffs seek
unspecified compensatory damages, legal fees and litigation costs.
The Company is unable to predict the outcome or the potential
financial impact of this litigation.
PAGE <9>
In June 1993, the Securities and Exchange Commission ("SEC")
commenced a formal investigation into possible violations of the
Federal securities laws in connection with the Company's public
reports and financial statements, as well as trading in the
Company's securities. The SEC has issued a formal order of
investigation which provides the SEC staff with the power to
subpoena documents and to compel testimony in connection with their
investigation. The Company is cooperating with the SEC in
connection with the investigation.
NOTE 5. IMPAIRMENT & RESTRUCTURING CHARGES
During the first half of 1993, the Company experienced
markedly decreased revenues from its health insurance services
business unit. Near the end of the second quarter of 1993, the
Company projected that its annual health insurance services
business revenues would drop by approximately 50% from the revenue
recorded in 1992 to approximately $30,000,000 for all of 1993, and
that trend of decline would continue into 1994. To better
understand both the cause and the anticipated duration of this
decline, the Company then undertook an assessment of the potential
impact on its health insurance services business of proposed health
care legislation, rapidly evolving and significant changes in the
relationship of health care providers and insurers and the
resultant changes in health insurers' software and service needs.
After meetings with its financial advisors, health care
professionals and customers, the Company determined that it did not
have some of the systems to respond to the most likely future
initiatives in the health care insurance industry and that many of
the Company's existing health products, primarily those acquired in
business acquisitions, would require substantial modification or
complete reformation. This determination and the continuing
adverse impact of operating losses led to the conclusion that the
current carrying value of the assets of the health business unit,
principally intangibles, was not fully recoverable through sale or
continuing operations. Accordingly, the Company recorded an
impairment charge of $54,890,000 at June 30, 1993 to reduce the
carrying value of certain long-lived identifiable intangible assets
($6,320,000 - customer lists, covenants not to compete and
assembled workforce), acquired software ($9,150,000) and goodwill
($39,420,000) related to its health insurance services business.
The Company applied its methodology for determining impairment
of intangibles by discounting the expected future cash flows from
this business. In this case, the present value of the expected
cash flows was determined using a discount rate of 17% which the
Company considers to be commensurate with the risk involved. This
rate was determined using the Capital Asset Pricing Model which
PAGE <10>
reflects the return the Company should achieve on its investments.
An additional risk premium was included in the rate to recognize
the uncertainty associated with the health insurance services
business.
Additionally, as a result of the impairment of its health
insurance services business, the Company decided to restructure
this business and recorded a restructuring charge of $25,189,000 at
June 30, 1993. Costs to restructure the health business are
composed of $5,211,000 associated with employee severance and
outplacement, and $19,978,000 related to an ongoing lease
obligation and/or termination for the planned future abandonment of
certain leased office facilities. The Company also recorded other
pre-tax restructuring charges of $655,000 at June 30, 1993. It is
anticipated that these restructurings will be completed during
1994.
NOTE 6. CHANGES IN ESTIMATED USEFUL LIVES
For all years through December 31, 1992, the Company had
amortized goodwill over an estimated useful life of 25 years. As
a result of its most recent evaluation, the Company has revised its
estimates of the period of future benefit for goodwill.
Consequently, effective January 1, 1993, the Company began to
amortize goodwill over an estimated life of 15 years for goodwill
related to information and computer services company acquisitions
and 10 years for goodwill related to software company acquisitions.
The Company believes these new lives more appropriately reflect the
current economic circumstances for such businesses and the related
period of future benefit. Longer lives will be used for future
business acquisitions only where independent third party studies
support such lives. The effect of this change in accounting
estimate was to increase amortization expense by $343,000 ($.01 per
share) and $2,283,000 ($.08 per share) during the three months and
nine months ended September 30, 1993, respectively. Also as part
of this evaluation, the net book value of intangible assets related
to the Company's health insurance services business of $45,740,000,
most of which was goodwill, was written off during the first half
of 1993.
For all years through December 31, 1992, the Company amortized
internally developed software on a straight-line basis over an
estimated useful life of four years. The Company's recent
experience indicates that an estimated useful life of five years
would more appropriately reflect the actual useful life of such
software. Accordingly, commencing January 1, 1993, the Company
began to amortize such software on a straight-line basis over five
years. Amortization charged to expense was $5,421,000 and
$16,193,000 for the three months and nine months ended September
PAGE <11>
30, 1993, respectively. As a result of this change in estimated
life, amortization expense was $428,000 ($.01 per share) and
$1,311,000 ($.03 per share) less than it would have been using the
previous four-year life for the three months and nine months ended
September 30, 1993, respectively.
In addition to the impairment and restructuring charges
relating to its health insurance services business described in
Note 4, the Company wrote off $1,368,000 relating to the
nonrecoverability of certain deferred life insurance systems
development costs at June 30, 1993.
NOTE 7. INCOME TAXES
On August 10, 1993 the Omnibus Budget Reconciliation Act of
1993 was signed into law. This Act increased the highest marginal
federal income tax rate from 34 percent to 35 percent. Under the
provisions of Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes", deferred tax liabilities and assets
are adjusted for the effect of a change in tax laws or rates.
Furthermore, the effect should be included in the income tax
provision for the reporting period that includes the enactment
date. Therefore, the effect of the rate change is included in the
income tax provision for the three and nine months ended September
30, 1993.
In 1992, the Internal Revenue Service completed an examination
of the Company's consolidated federal income tax returns for the
years 1985 through 1988 and has proposed certain adjustments to
income and credits that result in proposed tax deficiencies in the
amount of $17,785,000 for those years. The Company believes that
its judgment in the areas for which adjustments have been proposed
has been appropriate and is contesting the proposed adjustments.
The Company believes that adequate amounts of federal income taxes
are provided in the consolidated financial statements.
NOTE 8. STOCK REPURCHASE
On April 7 and 8, 1993 the Company repurchased, on the open
market, all of the 970,668 shares of the Company's common stock
authorized under a previously approved stock repurchase program for
a total consideration of $48,660,000.
PAGE <12>
POLICY MANAGEMENT SYSTEMS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The consolidated balance sheet as of December 31, 1992 has
been audited and is restated herein. The consolidated statements
of operations and cash flows for the three and nine months ended
September 30, 1993 and 1992 have been restated by the Company,
without audit, to conform to the adjustments to the Company's
retained earnings as of December 31, 1992, as discussed in Note 2
of Notes to Consolidated Financial Statements. These adjustments
include all adjustments which are, in the opinion of management,
necessary to state fairly the results for the periods presented.
Liquidity and Capital Resources
During the nine months ended September 30, 1993, the Company
generated cash flow from operations of $60,540,000, $11,404,000
used for investing activities and $50,322,000 used for financing
activities. Cash and equivalents and marketable securities
aggregated $154,416,000 at September 30, 1993 as compared to
$238,521,000 at December 31, 1992, a net decrease of $84,105,000.
The principal factors affecting such net decrease were the
acquisition of CYBERTEK Corporation in August 1993 for total
consideration of $59,727,000 and the repurchase in April 1993 of
970,668 shares of the Company's common stock for total
consideration of $48,660,000. Other significant expenditures
during the period included the acquisition of data processing and
communications equipment, support software and office furniture and
equipment ($32,304,000); software product acquisitions and debt and
contingency payments relating to past business acquisitions
($10,632,000) and completion of construction of additional office
and dining facilities at the Company's corporate headquarters
($1,693,000).
Significant expenditures anticipated for the remainder of
1993, excluding business acquisitions, are as follows: acquisition
of data processing and communications equipment, support software
and office furniture, fixtures and equipment ($3,600,000); and
completion of construction of additional dining facilities at the
Company's corporate headquarters ($300,000). The Company is also
anticipating that it will expend approximately $7,100,000 of
capitalizable costs relating to the internal development of its
software systems and approximately $453,000 on the purchase of
software for resale, during the remainder of 1993.
In August 1993, the Company completed its previously announced
acquisition of CYBERTEK Corporation for total cash consideration of
$59,727,000. As a result of acquiring CYBERTEK's broad based life
insurance software systems, the Company changed certain development
plans and, accordingly, $1,368,000 of related deferred life
insurance systems' costs were written-off for the nine months ended
PAGE <13>
September 30, 1993. The Company is currently enhancing and
integrating the business functions of CYBERTEK products with the
Company's Series III life insurance applications and its Integrated
Application Platform architecture. The Company expects this effort
to continue through 1996 with the anticipated initial release of
the integrated applications being made generally available in late
1994 or early 1995 with subsequent releases to follow. Total
expenditures related to this effort are expected to approximate
$34,000,000, of which $1,300,000 and $8,500,000 are anticipated for
the remainder of 1993 and for all of 1994, respectively. The
Company expects to generate savings through the closing of
CYBERTEK's data center operations and other cost reductions.
As described more fully below, the Company decided to
restructure its health insurance services business and take a
restructuring charge of $25,189,000 at June 30, 1993. Cash outlays
with respect to the restructuring charges are expected to be
approximately $745,000 during the remainder of 1993, approximately
$16,241,000 during 1994, and approximately $7,458,000 in future
years.
The Company completed, or intends to complete, the
expenditures referred to above for 1993, including the repurchase
of its shares and the acquisition for cash of CYBERTEK Corporation,
without incurring any indebtedness. The Company believes that cash
and equivalents and investment reserves at September 30, 1993
together with future cash flow from operations will be sufficient
to satisfy presently anticipated operating and capital resource
needs.
Results of Operations
Total revenues for the three and nine months ended September
30, 1993 were $108.9 and $344.8 million, respectively, representing
decreases of $15.2 and $18.0 million, respectively, compared to the
corresponding periods in 1992. These decreases were due primarily
to a reduction in professional services provided by the Company's
health insurance systems business and total policy management
services, principally related to the New Jersey Market Transition
Facility (MTF) project. The decrease for the nine months
comparison was partially offset by an increase in licensing
revenues of $6.6 million. The increase in licensing revenues for
the nine months comparison was due primarily to an increase in
initial license revenues of $5.4 million. Revenues from initial
licensing activities decreased $1.1 million for the three months
ended September 30, 1993 compared to the corresponding period in
1992. Revenues from continuing monthly license charges for
maintenance, enhancements and services availability ("MESA") and
for continuing right-to-use licenses increased $.4 and $1.2 million
PAGE <14>
for the three and nine months ended September 30, 1993,
respectively, compared to the corresponding periods in 1992.
Total services revenues for the three and nine months ended
September 30, 1993 were $93.2 and $286.2 million, respectively,
compared to the corresponding periods in 1992. Professional
services revenues were adversely affected by lower than planned
revenues from the Company's health and life insurance services
businesses. The Company recognized revenues of $7,217,000 and
$25,227,000 for the three and nine months ended September 30, 1993,
respectively, and incurred operating losses of $4,464,000 and
$14,211,000 for the three and nine months ended September 30, 1993,
respectively, from its health insurance services business. These
losses were before the effects of certain special charges described
below.
Near the end of the second quarter of 1993, the Company
projected that its annual health insurance services business
revenues would drop by approximately 50% from the revenue recorded
in 1992 to approximately $33,000,000 for all of 1993. The
Company's original forecast for 1993 health insurance services
annual revenues was approximately $78,000,000. To better
understand both the cause and the anticipated duration of this
decline, the Company then undertook an assessment of the potential
impact on its health insurance services business of proposed health
care legislation, rapidly evolving and significant changes in the
relationship between health care providers and insurers and the
resultant changes in health insurers' software and service needs.
As a result of its evaluation, the Company determined that
there was no market demand for many of its health insurance systems
and automation support services, principally designed for and
suited to traditional health indemnity insurance plans. Near the
end of the second quarter of 1993, it was becoming clear that
significant restructuring of the country's health care system would
occur, whether by government action or economic circumstances, and
consequently, insurers would be unwilling to make commitments for
any significant new systems until the uncertainty regarding the
ultimate outcome of reform was resolved. Furthermore, it seemed
most likely that traditional indemnity plans would not meet the
future needs of most employers and their insurers after such
changes.
After meetings in the second quarter and early third quarter
with its financial advisors, health care professionals and
customers, the Company determined that it did not currently have
some of the systems to respond to the most likely future
initiatives in the health care insurance industry and that many of
the Company's existing health insurance products, primarily those
acquired in business acquisitions, would require substantial
modification or complete reformation. This determination and the
PAGE <15>
continuing adverse impact of operating losses in its health
insurance services business led the Company to the conclusion that
the current carrying value of certain assets of the health
insurance services business unit, principally intangibles
associated with traditional health indemnity insurance plan
services, was not fully recoverable through sale or continuing
operations.
As a consequence of these factors, the Company recorded at
June 30, 1993, special impairment and restructuring charges to
reduce the carrying value of certain long-lived identifiable
intangible assets and goodwill and to recognize as a loss the
planned future abandonment of certain facilities and employee
severance and outplacement costs. As part of the Company's non-
cash impairment charges, acquired software amounting to $9,150,000
was written-off. Principal products that supported traditional
health indemnity insurance plans that were written-off included:
(1) a claims administration and payment system; (2) an
administrative system for membership, billing, collections and
receivables; and (3) a provider administration and reimbursement
system. The reduction in annual amortization related to these
software systems is approximately $2,551,000. Additionally, the
Company recorded other non-cash impairment charges in June 1993 to
write-off the carrying value of certain other identifiable
intangibles ($6,320,000) and goodwill ($39,420,000) which will
result in future amortization reductions of approximately
$3,796,000 on an annual basis.
The Company, as part of its restructuring charges, decided to
downsize its health staff from 437 at June 30, 1993 to
approximately 388 by the end of 1993, with additional reductions in
staff scheduled to take place during 1994. At September 30, 1993
the Company had 404 employees in its health group. These scheduled
reductions are estimated to reduce compensation and other benefits
cost by approximately $17,500,000 on an annual basis. The health
business is expected to continue to generate operating losses for
the remainder of 1993.
The Company, however, will continue to market and invest in
the internal development of its systems for managed care
applications. The Company believes these systems are suited for
larger, managed care plans and other health care payers.
The Company completed its acquisition of CYBERTEK Corporation
on August 24, 1993. CYBERTEK's revenues and net income for the
last full year prior to acquisition were $30,720,000 and
$3,059,000, respectively. For the three and nine months ended
September 30, 1993, the Company recognized revenues of $22,132,000
and $58,498,000 and operating losses of $2,077,000 and $11,735,000,
respectively, from its life insurance services business, including
PAGE <16>
the results of CYBERTEK since the date of acquisition. Of the
loss, $437,000 was attributable to amortization of intangible
assets arising from the CYBERTEK acquisition. Also, the Company's
decision to develop new releases of certain of its life systems
based on the business functions of CYBERTEK software and the
process of integrating CYBERTEK functionality into certain existing
Series III applications had the effect of significantly reducing
revenues and the operating loss from the life insurance services
business in the short term.
Revenues from information services were $50.8 and $143.8
million compared with $39.5 and $116.9 million for the three and
nine months ended September 30, 1993 and 1992, respectively. These
increases are primarily attributable to an increase in business
associated with automobile property and casualty information
services and life information services. The information services
business produced lower than expected operating profits for both
the three and nine month periods. The Company is attempting to
direct more of its information services business into database
products and life information services where margins are generally
higher. The Company typically realizes a lower gross margin from
information services than from software products and related
services.
Revenues from total policy management outsourcing services
were adversely affected by the previously announced wind-down of
the New Jersey Market Transition Facility (MTF) project. Prior to
the wind-down of the MTF, annual revenues in 1992 were
approximately $68,380,000. The Company expects such revenues to be
no more than $19,730,000 for 1993. The Company was not able to
reduce its operating expenses as quickly as the reduction in
revenue occurred because of ongoing contractual obligations. As a
result of an increased role in servicing additional new contracts
with insurance companies and residual markets, the Company should
start to replace revenues, lost from the New Jersey MTF project,
during the first half of 1994. Margins, however, will be reduced
during the early phases of these contracts due to start-up costs.
The Company has identified several states where it can
potentially offer similar total policy management services. After
evaluating the potential operating and economic risks of each
opportunity the Company will decide whether these services should
be marketed to the appropriate governmental agency. Contracts with
governmental agencies involve a variety of special risks, including
the risk of early contract termination by the governmental agency
and changes associated with newly elected state administrations or
newly appointed regulators.
The Company, in December 1993, signed one of the largest
outsourcing agreements in its history. The Company contracted to
PAGE <17>
provide data processing services for Vital Forsikring A.S., a life
insurance company in Bergen, Norway; this contract together with
other outsourcing contract opportunities in Scandinavia is expected
to generate revenues of approximately $150 million over the seven-
year term of the agreement based on expected services utilization.
Additionally, the Company, during the last half of 1993, entered
into several significant contracts with property and casualty and
life insurance companies for software licensing and related
implementation and consulting services.
The property and casualty insurance software and services
business achieved increased levels of revenue and operating income
primarily from licensing activities. This operating income more
than offset the losses in the health and life insurance services
businesses. The commitments by customers for new products were
greater than the Company's anticipation for this business, although
lower in the second half of 1993. Outsourcing services for
property and casualty insurers did not meet expectations due to
several contracts not closing or ramping up as fast as anticipated.
The Company believes that this and the slow down in licensing
activities was largely due to the Company's delay in releasing the
results of its special audit and having available audited financial
statements. The operating profit margin maintained a level similar
to that experienced historically for property and casualty systems
and services.
The Company in June 1993 recorded charges related to early
project terminations, the deductible under the Company's Directors'
and Officers' liability insurance policy in response to shareholder
litigation, cost overruns on certain projects and other charges
arising from the Company's previously disclosed internal
investigation of its accounting practices. These charges totaled
$18,100,000 (after tax $11,200,000) for the nine months ended
September 30, 1993.
Effective January 1, 1993, the Company revised its estimate of
the period of future benefit for goodwill and certain other
acquired intangible assets. The effect of this change in
accounting estimate was to increase amortization expense by
$343,000 ($.01 per share) and $2,283,000 ($.08 per share) during
the three and nine months ended September 30, 1993, respectively.
Commencing January 1, 1993, the Company revised the period over
which it will amortize its internally developed software. The
effect of this change in estimated life was to decrease
amortization expense by $428,000 ($.01 per share) and $1,311,000
($.03 per share), during the three and nine months ended September
30, 1993.
Investment income decreased $.8 and $1.1 million for the three
and nine months ended September 30, 1993, respectively, compared to
PAGE <18>
the corresponding periods in 1992. These decreases result
primarily from a lower level of investable funds which decreased as
a result of large cash expenditures relating to the acquisition of
CYBERTEK Corporation in August 1993 for a total consideration of
$59.7 million, the repurchase in April 1993 of 970,668 shares of
the Company's common stock for $48.7 million and other significant
expenditures totaling $44.6 million as discussed above.
The effective income tax (benefit) rates (income taxes
expressed as a percentage of pre-tax income) were 83.4% and (16.7)%
for the three and nine months ended September 30, 1993. The
foregoing effective income tax (benefit) rates include the impact
of the increase in the highest marginal corporate tax rate
resulting from the enactment of the Revenue Reconciliation Act of
1993, which was recorded in August 1993. The effective income tax
(benefit) rate for the nine months ended September 30, 1993 would
have been significantly higher (38%) were it not for the write off
of goodwill ($39,420,000) related to the impairment of the
Company's health insurance systems business in June 1993 (see Note
5 of Notes to Consolidated Financial Statements).
PAGE <19>
PART II
OTHER INFORMATION
POLICY MANAGEMENT SYSTEMS CORPORATION
Items 2, 3, 4, and 5 are not applicable
Item 1. Legal Proceedings
See Note 3, "Contingencies" of Notes to the Consolidated
Financial Statements.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
There are no exhibits required to be filed with this Quarterly
Report on Form 10-Q.
Reports on Form 8-K
The Company filed a report on Form 8-K, dated August 9, 1993
under Item 5. Other Events, relating to Arthur Andersen & Co.'s
withdrawal of its audit report on the Company's financial
statements for the year ended December 31, 1992. Additionally, the
Company filed a report on Form 8-K, dated August 17, 1993 under
Item 4. Changes in Registrant's Certifying Accountants, relating
to the change in the Company's principal independent auditor.
PAGE <20>
POLICY MANAGEMENT SYSTEMS CORPORATION
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.
POLICY MANAGEMENT SYSTEMS CORPORATION
(Registrant)
Date: November 17, 1994 By: Timothy V. Williams
Executive Vice President
(Chief Financial Officer)
