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RESTATED - SEE "INTRODUCTORY NOTE".
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 of (IRS Employer
incorporation or organization) Identification No.)
One PMS Center (P.O. Box Ten)
Blythewood, S.C. (Columbia, S.C.) 29016 (29202)
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803)735-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 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.
The aggregate market value of the voting stock held by non-affiliates of
the registrant was $797,531,112 at March 11, 1994 based on the closing market
price of the Common Stock on such date, as reported by the New York Stock
Exchange.
The total number of shares of the registrant's Common Stock, $.01 per
share par value, outstanding at March 11, 1994 was 22,637,021.
DOCUMENTS INCORPORATED BY REFERENCE
Item 4 of Registrant's Report on Form 8-K, dated August 17, 1993, is
incorporated by reference in Part II.
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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 DECEMBER 31, 1993.
PART I
ITEM 1. BUSINESS
THE COMPANY
ORGANIZATION AND GENERAL DEVELOPMENT
Policy Management Systems Corporation ("Company"), a leading
provider of standardized insurance software systems and automation,
administration and information services to the insurance industry,
is a South Carolina corporation incorporated in 1980. At December
31, 1993, the Company had 4,350 full-time employees and 4,786 total
employees located in offices in North America, Europe and
Australia.
Prior to 1985, the Company operated primarily as a provider of
insurance software systems and related automation support services
to property and casualty insurance companies. Since that time the
Company has broadened its software product and services offerings
through the introduction of new internally developed products and
services and business and software product acquisitions.
During 1985, the Company initiated an expansion into the
property and casualty information services business to assist
underwriters and claims professionals in the property and casualty
insurance marketplace. The Company began to acquire regional
providers of information services to provide the capability of
gathering and electronically communicating information from all
states and regions. By the end of 1986, the Company had completed
acquisitions, which provided for national coverage for Motor
Vehicle Reports and Personal Lines inspections. By November 1988,
the Company had completed acquisitions, which provided for national
coverage for Premium Audits and Commercial Line Inspections.
Through its nationwide information gathering network, the
Company provides the property and casualty insurance industry with
the information to assist insurers in making more informed
decisions on risk selection, pricing and claims adjusting. Most of
these services are provided on an automated basis to allow the
consistent application of underwriting standards and rules.
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From 1990 through 1993, the Company acquired businesses which
provide information services related to hospital medical records,
attending physician statements and personal history interviews
primarily for the life and health insurance industry. Since then,
the Company has expanded its operations and information services
offerings to the point that it now offers a wide range of
information services and related data base products to the property
and casualty, life and health insurance markets.
Between 1986 and 1989, the Company, through business
acquisitions, took its initial steps toward becoming a major
supplier of automation solutions for the life and health insurance
markets. Since then, the Company has continued to expand its
products and services offerings and in August 1993, acquired
CYBERTEK Corporation ("CYBERTEK") of Dallas, Texas. CYBERTEK is a
leading provider of information management systems and processing
solutions designed to meet the needs of the life insurance and
financial services industries. The Company is currently enhancing
and integrating the business functions of CYBERTEK products with
certain of the Company's Series III industry 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. CYBERTEK has a customer base of over 100 companies.
In 1987, the Company began to place more emphasis on the
processing services market for both the private and public sectors,
and today provides a full range of outsourcing services. These
services can range from processing a single line of business to
assuming responsibility for complete systems maintenance,
facilities management and processing and administration support of
an insurance company's business. The Company provides outsourcing
services from data centers located in North America, Europe and
Australia.
During the early stages of the Company's development, a major
portion of the Company's revenues were derived from systems
licensing activities (43.7% in 1985). As the Company has continued
to enhance its position as a provider of a full range of business
solutions, based upon automation, administration support and
information, to the insurance industry, the portion of the
Company's revenues derived from systems licensing activities has
steadily declined, representing 16.5% of total revenues in 1993.
The remainder of the Company's revenues are derived primarily from
automation, administration and information services activities.
The Company's strategy is to build a larger base of recurring
systems licensing and services revenues. As a result of this
emphasis, initial license charges, that portion of license charges
from systems licensing activities which is generally recognized as
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revenue upon execution of a license obligation and delivery of the
product, have continually declined, representing 5.8% of total
revenues in 1993, compared to 16.4% in 1985.
RECENT DEVELOPMENTS
In August 1993, the Company engaged independent accountants to
conduct a special audit of the Company's consolidated 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.
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 1992 audit, the Company determined the
specific prior period or periods in 1992 affected by the above
adjustments and also determined that retained earnings previously
reported as of December 31, 1991 required adjustment (see Note 2 of
Notes to Consolidated Financial Statements). The Company has
restated its financial statements for such periods and has filed
amended annual and quarterly reports on Forms 10-K and 10-Q for the
years 1993 and 1992.
SEGMENT INFORMATION
The Company operates in one business segment, the providing of
computer software systems and automation and administration support
and information services to the insurance industry.
The majority of the Company's revenues are generated from
products and services provided in the United States and no one
customer accounted for more than 10% of revenues during the year
ended December 31, 1993. The following table illustrates the
relative percentages of total revenue represented by the Company's
products and services in the United States and foreign countries.
Percent of Revenue
Year ended December 31,
1993 1992 1991
(Restated) (Restated)
United States........87.1% 84.5% 88.3%
Canada............... 4.3% 3.5% 3.6%
Europe............... 5.5% 8.3% 5.7%
Asia................. 3.1% 3.7% 2.4%
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PRODUCTS AND SERVICES
The Company offers over 135 business solutions, which include
more than 90 application software systems and a wide range of
outsourcing, professional and information services, designed to
meet the needs of the property and casualty, life and health
insurance markets.
The Company's primary software systems currently run on mid-
range and large scale IBM computers or IBM compatible equipment
utilizing most IBM operating systems. In addition, a number of
systems run on intelligent workstations.
Most customers licensing the Company's software systems also
use the Company's professional services, which are normally
provided under separate agreements. Customers using the Company's
information services do not necessarily license the Company's
software products. Over 100 customers currently utilize the
Company's various outsourcing services, which are provided under
contracts having terms up to fifteen years.
The Company obtains from third parties licenses for a wide
range of software products and services which are used in varying
degrees in developing and enhancing the Company's products and in
performing services for its customers. Such products range from
mainframe operating systems to graphical user interfaces. Although
such products licensed from third parties are important to the
products and services offered by the Company, there is generally no
single product licensed from a third party without which the
Company's development of its products and performing of its
services could not continue.
SOFTWARE PRODUCTS
The Company's software products automate most insurance
processing functions, including various underwriting, claims
accounting, financial and regulatory reporting and cash management
functions. The systems have been designed with the intent to permit
ease of use and provide flexibility in adapting them to a
particular customer's requirements and modifying them as business
conditions change. The systems are modular in structure and
facilitate the application of updates and enhancements and
interfacing and integration of the different systems. Most of the
systems will operate on either a stand-alone basis or in
conjunction with each other.
Series III technologies serve as a platform for the Company's
systems for the property and casualty, life and health insurance
markets. A primary objective of Series III is the full
integration of the information and data gathering, processing,
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underwriting, claims handling and reporting processes for providers
of insurance to create a cooperative processing environment where
insurance professionals, using advanced intelligent workstations,
can process multiple tasks concurrently with minimal clerical
support and data entry. The foundation of Series III is the
Company's Integrated Application Platform ("IAP"), more fully
described below. Series III uses advanced and emerging
technologies such as relational data bases, graphical user
interfaces and imaging. Series III technologies allow system
upgrades, additions and interfaces to be implemented much quicker
and at reduced costs, with a minimum of disruption to ongoing
operations. Using relational data bases and cooperative
processing between hardware platforms and allowing access to data
from multiple sources through advanced networks, Series III is
intended to provide a seamless flow of information between
insurance agents, branch offices and the home office of insurance
companies.
The Company relies upon contract, intellectual property,
copyright and other bodies of law to protect its products as trade
secrets and confidential proprietary information. The Company's
agreements with its customers and prospective customers prohibit
disclosure of the Company's trade secret and proprietary
information to third parties without the consent of the Company and
generally restrict their use of the Company's products to only
their operations. The Company also informs its employees of the
proprietary nature of its products and obtains from them an
agreement not to disclose proprietary information. Notwithstanding
those restrictions, it may be possible for competitors of the
Company to obtain unauthorized access to the Company's proprietary
information. The Company also has registered service marks or
pending applications for registration for many of its software
products.
The following is a detailed description of current principal
software products:
POLICY MANAGEMENT SYSTEM ("PMS") - PMS, the Company's most
comprehensive and widely used mainframe system, performs the
functions essential to all phases of the management of property and
casualty insurance policies. This system, which supports business
written by property and casualty insurance companies, is designed
to reduce paper work dependency, facilitate rapid access to
information and improve service. Principal automated functions
performed by PMS are policy rating and premium calculation, policy
printing, renewal and endorsement generation and certain
reinsurance processing.
POINT - An integrated midrange property and casualty
processing system designed to run on IBM's AS/400 computer,
providing the basic system functions (including policy, claims,
financial and reinsurance management and reporting) used by
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property and casualty insurance companies with annual direct
written premiums of up to approximately $150 million.
BILLING AND COLLECTION MANAGEMENT SYSTEM ("BCMS") - An on-
line system that automates management of property and casualty
insurance billing and collections for single, consolidated, third
party, agency, and account current disciplines. Personal and
commercial lines are supported and may be collected and paid
through on-line cash entry, lockbox, optical character readers
(OCR), or electronic funds transfer (EFT) methods. The system
features user defined pay plans, finance and service charges and
delinquency plans and supports payroll deduction plans.
BILLING AND COLLECTION WORKSTATION ("BCWS") - Client/server
solution that automates the management of billing and collections
for property and casualty, individual life and health, and group
life and health lines of business. Multiple billing disciplines
(including single policy, account bill, third party, agency, and
account current) and collection methods (including cash entry,
lockbox, OCR, EFT, and credit card) are designed to offer enhanced
flexibility to the user.
INSURANCE MANAGEMENT INFORMATION SYSTEM ("IMIS") - A
management information and reporting system that provides premium,
loss experience, reinsurance and actuarial reporting to satisfy
insurance company management and statutory reporting requirements
for property and casualty insurance companies.
MANAGEMENT INFORMATION SYSTEMS ("MIS") - A client/server
system that provides data generation and manipulation capabilities
to fulfill the management, annual statement, actuarial, bureau, and
other reporting requirements of a broad range of insurance
companies.
MANAGEMENT WORKSTATION ("MWS") - An intelligent workstation
based system designed for use in conjunction with MIS to capture
and display management information.
MANAGEMENT DECISION SUPPORT ("MDS") - Workstation tool that
provides insurance professionals with the capability to design and
run queries against information contained in relational databases
and allows on-line access to current and historical versions of
various standard reports.
MICRO MAINFRAME SYSTEM ("MMS") - An intelligent workstation
based system designed to meet the policy processing and rating
needs of property and casualty insurance companies. MMS emulates
mainframe functions on a workstation allowing the maintenance of
software rating applications that run in either a mainframe or
workstation environment.
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UNDERWRITING WORKSTATION ("UWS") - Client/server solution that
stores and manages policy information in a central location to
improve the accuracy and consistency of underwriting decisions.
Automates rate, quote, and policy issuance, eliminating the need
for manual intervention.
UNDERWRITING MANAGEMENT SYSTEM ("UMS") - An integrated system
providing the capability to store and manage policy information in
a central location to facilitate the accuracy and consistency of
underwriting decisions.
CLAIMS HANDLING SYSTEM ("CHS") - An intelligent workstation
based system which automates most claims handling related functions
of property and casualty insurance companies, including claims
payments, and facilitates the uploading and downloading of claims
information between host and remote computers.
CLAIMS WORKSTATION ("CWS") - Client/server system that
automates the claims handling processes, as well as providing
access to the various claims functions and information in a
distributed environment.
PRODUCT DEVELOPMENT SUPPORT SYSTEM ("PDSS") - Client/server
system which facilitates and expedites the development of new and
modification of existing life and health insurance products by
centralizing product rules and information into a building block
format for easy, timely access and manipulation. Once product
rules and information are input, they can be used for a number of
different products.
HEALTH ENTERPRISE SOLUTION ("HES") - A comprehensive series
of systems designed for the administration and management of most
indemnity and managed care health products. Functions supported
include point of service, capitation and a full array of other
managed care requirements. HES includes the ADMIN, and CAPS as
sub-systems.
CLAIMS ADMINISTRATION AND PAYMENT SYSTEM ("CAPS") - A claims
administration and payment system with advanced capabilities
supporting the cost management and extensive data collection needs
of most health insurers. CAPS is utilized primarily by large
health insurance companies and Blue Cross and Blue Shield
organizations.
CLAIMS ADMINISTRATION SYSTEM ("CAS II") - An on-line immediate
update claims system that supports cost management programs, such
as Preferred Provider Organizations, precertifications and second
surgical opinions for medium-sized insurance companies or self-
administered clients.
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GROUP ADMINISTRATION AND BILLING SYSTEM ("ADMIN") - A group
health insurance billing and administration system which automates
and integrates membership, premium calculation, billing and
collection, receivables, arrears and information management. This
product is used primarily by large health insurance companies and
Blue Cross and Blue Shield organizations.
PROVIDER INFORMATION SYSTEMS ("PIMS") - A relational database
provider information solution that retains information on
demographics and pricing solutions in order to administer HMO and
managed care business requirements.
PMSO AUBEN-UND INNENDIENST WORKSTATION ("AIWS") - A single use
interface which allows users to support the sale of life, health,
accident, and property insurance in Europe. AIWS is an all lines
quote, offer and application system and provides agents with a
client system for acquisition data and detailed policy information.
Based on OS/2, AIWS can operate in stand-alone or local area
network environments and can communicate with administration
systems.
AGENCY WORKSTATION-THE BUNDLE ("AWS") - A micro-based agency
system that provides personal and commercial lines rating, flood
rating, marketing functions and access to Motor Vehicle Reports.
ADVANCED COMMUNICATIONS ACCESS ("ACA") - A Series II genesis
bridge between application systems that interfaces IBM mainframe-
based company systems with mini- and micro-based systems. ACA
provides communications, data translation, and routing
capabilities, and supports ACORD and SCIO standards for several
lines of business.
PRIVATE LIFE INSURANCE SYSTEM ("PLIS") - European automatic
user-controlled computer system for processing of individual life
insurance policies which covers all functions in the production of
Individual Life Insurance and Pension Plans including: signing of
new policies, policy endorsements, reimbursements, premium
payments, simulation and statistics and case processing.
AUTOMATED INFORMATION SYSTEM ("AIS") - An integrated
information order, delivery, evaluation, and management platform
featuring a mainframe database that can be accessed by terminals or
intelligent workstations via cooperative processing. AIS allows
users to access information designed to facilitate the insurance
underwriting and claims settlement process from multiple vendors.
CLIENT INFORMATION SYSTEM ("CIS") - DB/2-based mainframe
system which serves as a common repository of information relating
to an insurance company's clients and provides an index to other
corporate data. CIS bridges computer systems, regardless of the
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software product and vendor, and displays various business
relationships that exist between the client and the insurance
company.
CLIENT INFORMATION WORKSTATION ("CIWS") - Client/server
solution that automates the management of information about a
person, company, prospect or provider who has a relationship with
an insurance company.
WORK IN PROCESS ("WIP") - WIP facilitates the management,
including tracking, assigning, reassigning and controlling, of
various tasks generated in an insurance company environment.
CORPORATE INVESTMENT MANAGEMENT SYSTEMS ("CIMS") - A series of
investment systems designed for managing complex investment
portfolios which handles most types of securities and includes
portfolio segmentation, asset valuation and complete accounting
control capabilities. These systems, which will operate on a
stand-alone basis or in conjunction with each other, may be used by
all types of insurance companies.
FINANCIAL MANAGEMENT SYSTEM ("FMS") - An integrated
accounting and financial reporting system which includes general
ledger and budgeting capabilities, distribution of income and
expense data by categories and the preparation of a variety of
financial and accounting reports.
INTEGRATED APPLICATION PLATFORM ("IAP") - A technical
platform which, using cooperative processing technologies, provides
the capability to develop applications and link software systems,
whether they be those of the Company or another party. Includes
data models, process models and other Series III architecture
foundations.
CK4/VS - An advanced administration system that provides
real-time processing for advanced or traditional life, annuity and
health insurance products. CK4/VS' exclusive Product Line
Architecture allows the user to define unique, competitive products
without costly modifications. CK4/VS offers fast product
introduction, increased productivity and strong agent and
policyholder service because of its real-time processing and
communication structure.
CK4 WORKSTATION ADVISOR - Allows the Personal Computer (PC) to
be utilized to provide an intelligent administrative workstation
for mainframe and client/server based applications. CK4
Workstation Advisor acts as a PC-based "front-end" to mainframe-
based applications with pre-programmed transactions, on-line user
documentation and function help at the data element level. A
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scripting facility allows business processes to be re-engineered to
improve productivity and enhance customer service.
CK4 PLAN ADVISOR - A PC-based system which utilizes expert
system technology to provide an efficient method of designing,
developing and introducing new products. CK4 Plan Advisor creates
reference files and related user table entries required to support
a new plan or to convert an existing plan to CK4/VS. CK4 Plan
Advisor eliminates the need for extensive insurance systems
knowledge normally required to establish the files and tables by
asking a series of easy to understand questions, leading the user
through a selection process of the required plan specifics, table
updates and premium rates.
SALESPRO - An integrated sales illustration system used by
agents, which produces advanced sales illustrations for products
like universal life, variable universal life, interest sensitive
life, whole life and annuities. Options for split dollar,
comparisons, executive bonus plans, and deferred compensation are
also available.
ELECTRONIC POLICY ISSUE - Takes data compiled in the SalesPro
proposal and transmits it to the home office. This system provides
the customer with the option of handling the entire issuing
process, including printing the application and policy form, or,
simply transmitting the policy to the home office mainframe for
review and approval.
FIELD LINK - Provides communications and data linkage to
connect their remote sales force with home office databases. Field
Link expedites policy issue and delivery by making up-to-the-minute
information available to both the agent and the home office via the
agent's PC. Policy data may be held solely at the mainframe, or
may be down-loaded to a database at the PC that contains selected
policy data. Queries may then be directed to either the PC
database or the mainframe, as needed.
CK4 DOCUMENT MANAGER - Is designed to utilize PCs with a Local
Area Network (LAN) within a company to provide efficient document
management software for incoming and outgoing faxes and scanned
documents within a company. Instead of information arriving on a
fax machine, a PC-based fax server accepts incoming faxes
electronically and routes or distributes the documents to users
both internally or externally. Additionally, CK4 Document Manager
accommodates the integration of electronic mail and scanned
documents to provide a comprehensive document management system.
CYBERSCRIBE V - An automated correspondence system for the PC
that can draw policy or client information from databases. The
clients' existing word processing package is then used to create
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letter text which CYBERSCRIBE V merges with the database
information.
MICRO TO MAINFRAME COMMUNICATION ARCHITECTURE (MMCA) -
Provides the telecommunications framework that allows connectivity
from PCs to host mainframe computers, with no changes to
applications programs, in a variety of environments. MMCA is a
connectivity tool that gives a system the flexibility to adapt to
new data communications hardware and software.
NEW BUSINESS EXPEDITOR - Integrates several existing systems
to automate the processing of a new policy application, including
the initial sales proposal, policy submission, underwriting,
information gathering, and final policy issuance. New Business
Expeditor integrates with CK4/VS and other individual life
insurance administrative systems.
CK4 UNDERWRITING ADVISOR - Uses the COGENSYS Judgment
Processor combined with Auto/Issue and an application entry
component to automate the underwriting process. The Judgment
Processor uses case-based reasoning to make decisions according to
the parameters taught to the system by an experienced life
insurance underwriter.
CK4 INFORMATION EXPEDITOR - Uses electronic data interchange
to manage the information coming into the home office from third
party information providers. Reports from information providers
such as blood test results and inspection reports are receipted and
matched with the application file electronically.
COGENSYS SOFTWARE:
THE JUDGMENT PROCESSOR - A software system designed to emulate
the decision-making logic of an effective human expert within
a specific area of intellectual activity. The Judgment
Processor "learns" the logic of its mentor by observing real
examples of the mentor's decision making process as the mentor
continues to work at day-to-day tasks.
THE INFORMATION MANAGER - A front-end system with the ability
to create and manipulate electronic versions of forms which
are used in conjunction with the Judgment Processor. It lets
the expert (mentor) define data entry forms, calculations,
report generation functions and data communications with
minimal assistance from a programmer. It includes a flexible
text analysis and evaluation system that allows the
translation of free-form textual data into a computer-
recognizable, pre-defined format. The system is flexible and
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multilingual. It provides an automatic interface between
spreadsheets and existing microcomputer and mainframe
databases within a customer's institution.
THE APPLICATION MANAGER - A scheduling and tracking system
that manages the activities of the Judgment Processor and
Information Manager. It integrates the entire COGENSYS
Judgment Software line of products and provides query and
management reports of the entire process.
SERVICES
The following is a description of the Company's principal
services offerings:
OUTSOURCING SERVICES - The Company offers comprehensive
outsourcing services from its data centers located in North
America, Europe and Australia. These services range from providing
processing capabilities for unique, highly regulated lines of
business such as Massachusetts automobile, Texas personal lines and
automobile assigned risk plans; to providing complete processing
capabilities for all or most of a customer's business by making
available software systems licensed from the Company on a remote
basis; to assuming complete systems management, processing and
administration support responsibilities for a customer, including
complete policyholder services and claims support.
INFORMATION SERVICES - The Company offers a wide range of
information services which are packaged to facilitate efficient
review and use and may be ordered and received on an automated
basis through the Company's nationwide telecommunications network
using the Company's database products. These information services,
which are designed to assist insurance professionals in making
better decisions about risk selection, pricing and claims
settlement, currently include motor vehicle reports (driving
record), undisclosed driver information, driver mileage
verification, claims histories, credit reports and histories,
property inspection and valuation reports, property claims
estimating, premium audits, physician reports and medical
histories.
PROFESSIONAL SERVICES - In addition to the services described
above, the Company offers a full range of professional services to
assist customers in attaining the most effective use of their
systems. These services include systems implementation and
integration assistance, consulting, education and project planning.
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MARKETING AND CUSTOMERS
The Company markets its products and services to several
thousand property and casualty insurance companies, life insurance
companies and health insurance organizations and independent agents
and adjusters. In addition, the Company offers its software
products and automation and administration support services in 24
foreign countries. At December 31, 1993, the Company was
providing its information services to more than 9,000 insurance
companies, agents and adjusters and had a total of over 3,000
software systems licenses in force.
The Company markets its products and services through a staff
of approximately 200 employees, including salesmen and marketing
support personnel, most of whom are specialists in the insurance
industry and data processing. The Company's marketing force works
extensively with each prospective customer, analyzing its specific
requirements. Consequently, this process may extend over several
months for a prospective customer looking for a major automation,
administration support or information solution.
In addition to its own software products, the Company markets
certain software products of other parties to its customers.
Typically, these products are designed to perform noninsurance
functions or to improve the control and productivity of computer
resources.
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LICENSING
The Company's revenues are generated primarily by licensing to
customers standardized insurance software systems and providing
automation, administrative and information services to the
insurance industry.
Software systems are licensed under the terms of substantially
standard nonexclusive and nontransferable license agreements, which
generally have a noncancelable minimum term of six years and
provide for an initial license charge and a monthly license charge.
The initial license charge grants a right to use the software
system available at the time the license is signed. The monthly
license charge provides access to Maintenance, Enhancements and
Services Availability ("MESA"). Under the maintenance provisions
of MESA, the Company provides telephone support and error
correction to current versions of licensed systems. Under the
enhancement provisions of MESA, the Company will provide any
additions or modifications to the licensed systems, which the
Company may deliver from time to time to licensees of those systems
if and when they become generally available. Services availability
allows customers access to professional services, other than
maintenance and enhancements, which are provided under separate
arrangements during the MESA term.
The Company provides professional support services, including
systems implementation and integration assistance and consulting
and educational services, which are available under services
agreements and charged for separately. These services are
generally provided under time and material contracts and in some
circumstances under fixed price arrangements.
The Company also offers information and outsourcing services
ranging from making available software licensed from the Company on
a remote processing basis from the Company's data centers, to
automated information services through the Company's North America
telecommunications network using the Company's database products.
Outsourcing services are typically provided under contracts having
terms from three to ten years.
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COMPETITION
The computer software and services industry is highly
competitive. Based upon its knowledge of the industry, the Company
believes it is a leading provider of comprehensive insurance
software systems and automation and administration support and
information services to the insurance industry. Insurers which
internally develop systems similar to those of the Company, along
with their affiliates, are not likely to become major customers of
the Company for software. There are also a number of independent
companies who offer software systems which perform certain, but not
all of the functions performed by the Company's systems.
There are a number of larger companies, including computer
manufacturers, computer service and software companies and
insurance companies, that have greater financial resources than the
Company and the technological ability to develop software products
similar to those offered by the Company. There are also a number
of companies that provide information services similar to those
provided by the Company to the insurance industry. These
companies, especially the larger ones, present a significant
competitive challenge to the Company's information services
business.
The Company competes on the basis of its service, price,
system functionality and technological advances. However, the
Company believes that the most important considerations for
potential consumers of its products and services are product
capability, ease of installation and use, reliability and quality
of technical support, documentation and training, integration of
the products and services capabilities and the experience and
financial resources of the Company.
PAGE <17>
PRODUCT DEVELOPMENT
The history of the computer software and services industry has
seen rapid changes in hardware and software technology. These
changes require the Company periodically to modify and enhance its
product offerings in an effort to accommodate changes to, and to
insure compatibility with, the latest hardware and software used by
its customers. The Company continues to upgrade its products and
add new features to meet the changing needs of its customers.
An example of the Company's continuing product development
efforts to ensure that it is in a position to meet the growing
automation needs of the insurance industry is the Company's new
generation of systems, Series III (see Products and Services,
Software Products). The Company's efforts on Series III development
have been further enhanced by IBM, pursuant to the Development and
Marketing Agreement between the Company and IBM, providing the
Company with certain machines, programs and services to assist in
the continuance of the Company's conversion of its major insurance
industry applications software to client/server/host architecture
and the development of other insurance industry applications
software.
Although development efforts for the full release of Series
III for the property and casualty insurance industry will continue,
major components of Series III have been delivered since
development began in 1987.
While the Company intends to continue to develop applications
for IBM architecture platforms, it also intends to support open
systems. The first agreement to support open systems development
is with NCR Corporation ("NCR"), an AT&T subsidiary. NCR, now
known as AT&T Global Information Solutions ("AT&T Global") and the
Company will jointly market the Company's Series III systems
worldwide to insurance companies implementing AT&T's UNIX-based
solutions. AT&T Global has provided a full range of scalable
platforms to the Company. In addition, AT&T Global has made a
commitment to support the marketing of the Series III software and
to participate in the funding of the conversion of the Series III
host-associated software to AT&T Global's UNIX-based platforms.
AT&T has played a major role in the communications segment of the
insurance industry and has a long-standing relationship with the
Company. AT&T's acquisition of NCR, a leader in open systems
computing, allows the Company to respond to these trends and meet
the broader needs of the insurance industry. The agreement is
initially focused on the property and casualty sector of the
insurance industry.
In an effort to maintain and strengthen its competitive
position, the Company expends substantial amounts on internal
product development. Expenditures for internal product development,
PAGE <18>
which were capitalized, were $24.7, $24.3 and $28.7 million in
1993, 1992 and 1991, respectively, representing 5.5%, 5.0% and
7.0%, respectively, of total revenues. In addition to its
continuing development efforts, the Company has, in the past
several years, expended significant amounts on business and
software product acquisitions in an effort to expand its product
and services offerings and its presence in the marketplace. The
Company acquired software products with a cost basis of $25.1,
$17.7 and $1.6 million in 1993, 1992 and 1991, respectively,
representing 5.5%, 3.6% and .4%, respectively, of total revenues.
The Company intends to continue to expand its product and services
offerings through internal development and acquisitions.
ITEM 2. PROPERTIES
The Company owns its Columbia, South Carolina, headquarters
complex and 145 acres of land on which the facility is located. In
early 1993, the Company completed construction of a 176,000 square
foot addition to its corporate headquarters costing $16,200,000.
The Company leases space for its regional and branch offices under
various leases.
The Company, through its data centers located in North
America, Europe and Australia, utilizes 12 mainframe computers. All
computers are owned or held under long-term leases. In total, these
computers have 5,232 megabytes of memory and are capable of
processing approximately 621.6 million instructions per second.
The Company is currently utilizing 75% to 80% of this capacity.
ITEM 3. LEGAL PROCEEDINGS
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 is 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 Company is unable to predict the outcome or the
potential financial impact of this litigation.
PAGE <19>
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 Company is cooperating with the SEC in
connection with the investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PAGE <20>
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
G. Larry Wilson 47 Chairman of the Board, President and
Chief Executive Officer
David T. Bailey 47 Executive Vice President
Charles E. Callahan 45 Executive Vice President
Donald A. Coggiola 54 Executive Vice President
Robert L. Gresham 51 Executive Vice President
Stephen G. Morrison 44 Executive Vice President, Secretary
and General Counsel
Timothy V. Williams 44 Executive Vice President and Chief
Financial Officer
Jeffrey S. Bragg 45 Senior Vice President
James P. Brown 47 Senior Vice President
G. Larry Wilson - Chairman of the Board (since 1985),
President and Chief Executive Officer of the Company (since 1980)
and his current term as Director will expire in 1995; Director of
LEGENT Corporation, Vienna, Virginia. Employed by the Company
since its inception.
David T. Bailey - Executive Vice President of the Company
since 1986. Responsible for the Property and Casualty Insurance
Group. Employed by the Company since 1981.
Charles E. Callahan - Executive Vice President of the Company
since 1989. Responsible for the Life, Health and Information
Services Group. Employed by the Company since 1983.
Donald A. Coggiola - Executive Vice President of the Company
since 1986. Responsible for the Industry Markets Group. Employed
by the Company since 1979.
Robert L. Gresham - Executive Vice President of the Company
since 1986. Responsible for the Corporate Services Group. Employed
by the Company since 1978.
Stephen G. Morrison - Executive Vice President, Secretary and
General Counsel of the Company since January 1994. Responsible for
the administration of the legal affairs of the Company. Employed
by the Company since January 1994. Prior to joining the Company,
Mr. Morrison was engaged full time in the practice of law as Senior
Partner with Nelson, Mullins, Riley & Scarborough in Columbia,
South Carolina. In that capacity, Mr. Morrison served as the
Company's chief outside litigation counsel for matters other than
those described in Note 8 to the Financial Statements. Mr.
Morrison will continue his affiliation with Nelson, Mullins, Riley
& Scarborough and continue to perform certain services in that
capacity on a declining basis.
PAGE <21>
Timothy V. Williams - Executive Vice President and Chief
Financial Officer of the Company since February 1994. Responsible
for the Financial Services Group. Employed by the Company since
February 1994. Prior thereto, Mr. Williams served in senior
management capacities with Holiday Inn Worldwide, based in Atlanta,
Georgia, most recently as Executive Vice President of Corporate
Services and Chief Financial Officer.
Jeffrey S. Bragg - Senior Vice President of the Company since
1993. Responsible for the Health and Information Services Group.
Employed by the Company since 1987.
James P. Brown - Senior Vice President of the Company since
1992. Responsible for the Total Policy Management Group since
February 1994. Employed by the Company since 1982.
PAGE <22>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock
Exchange, symbol PMS. The Company has never paid or declared a
cash dividend on its common stock. The following table sets forth
for the calendar periods indicated the high and low market prices
for the Company's common stock.
1993
High Low
First Quarter............................. $87 1/4 $74 1/2
Second Quarter............................ 86 1/4 32
Third Quarter............................. 36 21
Fourth Quarter............................ 31 22 1/4
1992
High Low
First Quarter............................. $73 $63
Second Quarter............................ 70 59
Third Quarter............................. 76 1/2 62
Fourth Quarter............................ 83 1/2 71 1/2
Title of Class
Common Stock, $.01 par value
Number of Record Holders as of March 11, 1994
1,584
PAGE <23>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
(Unaudited) (Unaudited) (Unaudited)
(Restated) (Restated) (Restated) (Restated)
Results of Operations 1993 1992 1991 1990 1989
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Revenues...........................$453,099 $489,261 $411,156 $341,692 $262,271
Operating income (loss)............ (77,053) 78,971 63,659 51,207 43,046
Other income and expenses, net..... 10,656 11,792 9,117 4,222 2,257
Income (loss) before income
taxes (benefit).................. (66,397) 90,763 72,776 55,429 45,303
Net income (loss)..................$(56,134) $ 61,522 $ 47,596 37,166 29,741
Net income (loss) per share........$ (2.46) $ 2.65 $ 2.21 $ 1.92 $ 1.77
Fully diluted net income per
share............................ - - $ 2.14 $ 1.80 $ 1.66
Financial Condition
Cash and equivalents and
marketable securities............$156,772 $238,521 $197,414 $152,994 $143,834
Working capital.................... 206,756 286,687 232,245 200,098 193,808
Total assets....................... 659,803 706,942 632,692 529,249 476,580
Long-term debt (excludes
current portion)................. 5,655 6,001 5,976 102,633 103,151
Total liabilities.................. 182,831 127,866 132,813 201,841 188,631
Stockholders' equity............... 476,972 579,076 499,879 327,408 287,949
<FN>
The above data should be read in conjunction with the Consolidated Financial
Statements and Notes thereto appearing in this Annual Report on Form 10-K.
</TABLE>
PAGE <24>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The consolidated balance sheet as of December 31, 1992 and the
related consolidated statements of operations, changes in
stockholders' equity and cash flows for the year then ended have
been audited and are restated herein. The consolidated statements
of operations, changes in stockholders' equity and cash flows for
the year ended December 31, 1991 have been restated by the Company,
without audit to conform to the adjustments to the Company's
retained earnings as of December 31, 1991, 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 period presented.
Results of Operations
Revenues
Total licensing revenues were $74.7, $73.0 and $76.0 million
in 1993, 1992 and 1991, respectively, representing 16.5%, 14.9% and
18.5% of total revenues. Total licensing revenues for 1993
increased $1.7 million (2.3%) compared to 1992, due primarily to
increased revenues from continuing monthly license charges for
maintenance, system enhancements and services availability ("MESA")
and for continuing right-to-use licenses of $2.7 million (6.0%)
compared to 1992. This increase was partially offset by a
reduction in initial license revenues related primarily to a
decrease in both the life and health insurance systems businesses.
However, the Company's property and casualty systems business
experienced an increase in 1993 licensing revenues, compared to
1992. Total licensing revenues for 1992 decreased $3.0 million
(3.9%) compared to 1991, due primarily to a reduction in initial
license charges ($6.4 million) related primarily to a decrease in
the property and casualty insurance systems business. This
decrease was partially offset by an increase in MESA revenue and
for continuing right-to-use licenses of $3.4 million.
Total services revenues were $378.4, $416.3 and $335.2 million
in 1993, 1992 and 1991, respectively, representing 83.5%, 85.1% and
81.5% of total revenues. Changes in the total services revenue
decrease were affected by activities in professional, outsourcing
and information services, as described more fully below.
Revenues from professional services were $66.7 million for
1993, a decrease of $23.9 million (26.4%) compared to 1992. The
decrease was primarily attributable to a decrease in services
related to the Company's health insurance systems business.
The Company originally forecasted 1993 health insurance
systems annual revenues of approximately $78 million. However,
PAGE <25>
near the end of the second quarter of 1993, the Company projected
that its annual health insurance systems business revenues would
drop by approximately 50% from the revenue recorded in 1992 to
approximately $33 million for all of 1993. The Company believes
this decline was directly related to the significant restructuring
proposals to the country's health care system and the unwillingness
of insurers to make commitments for any significant new systems
until the uncertainty regarding the ultimate outcome of reform was
resolved. For a more detailed discussion of the effects of health
care reform, see Costs and Expenses below.
Revenues from outsourcing services were $116.9 million for
1993, a decrease of $49.4 million (29.7%) compared to 1992. The
decrease was primarily attributable to the wind down of the New
Jersey Market Transition Facility (MTF) project. Prior to the wind
down of the MTF, annual MTF revenues in 1992 were approximately
$68.4 million. Revenues decreased $48.7 million to $19.7 million
for 1993 as the project came to an end. As a result of an
increased role in servicing additional new contracts with insurance
companies and residual markets, the Company will start to replace
revenues, lost from the MTF, during the first half of 1994. The
Company, in December 1993, signed one of the largest outsourcing
agreements in its history. The Company contracted to 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, could generate
revenues of up to approximately $150 million over the seven-year
term of the agreement based on expected services utilization.
Total revenues from professional and outsourcing services for
1992 were $256.9 million as compared with $185.9 million for 1991
(services were not segregated between professional and outsourcing
prior to 1992). This $71.0 million increase is primarily
attributable to policy management and processing services to the
New Jersey Market Transition Facility (MTF) project, facilities
management and outsourcing contracts in Europe and Australia, and
several new outsourcing contracts in the United States.
Revenues from information services were $191.7, $154.8 and
$147.3 million for 1993, 1992 and 1991, respectively. The increase
between these years is primarily attributable to the acquisition of
PMS, Inc. (PMSI) of Waco, Texas, effective November 1, 1990 and to
an increase in new business associated with automobile property and
casualty information services and life information services. PMSI
provides information services, particularly attending physician
statements and personal medical history interviews primarily to
life insurers throughout the United States. Increases related to
this acquired business were $8.1 and $7.2 million for 1993 and
1992, respectively. These increases, however, were partially
PAGE <26>
offset by a reduction in property and casualty information services
revenue associated with risk services.
Costs and Expenses
Although employee compensation and benefits remained
relatively unchanged from 1992 to 1993, the Company did experience
a reduction in compensation and other benefits resulting from a
downsizing in the Company's health insurance systems staff.
The Company, as part of its restructuring charges, decided to
downsize its health staff from 437 at June 30, 1993 to
approximately 388 at the end of 1993, with additional reductions in
staff scheduled to take place during 1994 (see Note 13 of Notes to
Consolidated Financial Statements). This decrease was partially
offset by an increase in costs associated with the acquisition of
CYBERTEK Corporation in August 1993, and the acquisition of a data
center, including its workforce, in Bergen, Norway, in December
1993.
Employee compensation and benefits expense increased $10.9
million for 1992 compared to 1991, primarily as a result of
increased costs associated with European and Australian facilities
management and outsourcing contracts.
Computer and communications expenses increased $2.2 million to
$41.9 million for 1993 compared to $39.7 million for 1992. This
increase results primarily from increased costs associated with the
acquisition of CYBERTEK Corporation and the acquisition of a data
center in Bergen, Norway. Computer and communications expenses
increased $8.9 million for 1992 compared to 1991. This increase
was primarily related to increased costs associated with policy
management and processing services, principally the MTF project,
and to European and Australian facilities management and
outsourcing contracts.
Information services and data acquisition costs increased
$37.5 million to $130.3 million for 1993 compared to $92.8 million
for 1992; 1992 reflects an increase of $13.5 million compared to
$79.3 million for 1991. These increases are due primarily to an
increase in the volume of state fees for motor vehicle reports,
related to new business, which is part of the Company's property
and casualty information services business.
Other operating costs and expenses for 1993 remained
relatively unchanged from 1992. The Company did, however, in June
1993, record certain one-time 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, amounting to $16.4
million. Partially offsetting these charges, other operating costs
and expenses declined in 1993 as a result of a reduction in costs
PAGE <27>
associated with the wind down of the New Jersey MTF project and an
increase in amounts capitalized principally related to the internal
development of the Company's property and casualty and life
software systems.
The Company undertook an assessment of the potential impact on
its health insurance systems business of proposed health care
legislation, the 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
would be no market demand for many of its health insurance systems
and automation support services, principally those designed for and
suited to traditional health indemnity insurance plans. Near the
end of the second quarter of 1993, it was 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
of 1993 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 insurance products, primarily those acquired in
business acquisitions, would require substantial modification or
complete reformation. This determination and the continuing
adverse impact of operating losses in its health insurance systems
business led the Company to the conclusion that the current
carrying value of certain assets of the health insurance systems
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, impairment charges to reduce the carrying value of
certain identifiable intangible assets and goodwill related to its
health insurance systems business of $54.9 million and
restructuring charges of $25.2 million associated with employee
severance and outplacement ($5.2 million), and to an ongoing lease
obligation and/or termination for the planned future abandonment of
certain leased office facilities ($20.0 million) (see Note 13 of
Notes to Consolidated Financial Statements). As part of these
non-cash impairment charges, acquired software amounting to $9.2
million 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
PAGE <28>
receivables; and (3) a provider administration and reimbursement
system. The reduction in annual amortization related to these
software systems is approximately $2.6 million. Other non-cash
impairment charges to write-off the carrying value of certain other
identifiable intangibles ($6.3 million) and goodwill ($39.4
million) will result in future amortization reductions of
approximately $3.8 million on an annual basis.
Other operating costs and expenses for 1992 increased $29.4
million compared to 1991. This increase results primarily from
increased costs associated with providing total policy management
outsourcing services, principally the New Jersey MTF, and to
European and Australian facilities management and outsourcing
contracts.
Operating Income
Operating income was $79.0 and $63.7 million for 1992 and
1991, respectively, compared with an operating loss of $77.1
million for 1993. The operating loss for 1993 was after giving
effect to special charges of $98.8 million relating to impairment
and restructuring charges ($80.7 million) and charges principally
arising from the Company's previously disclosed internal
investigation of its accounting practices ($18.1 million).
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 $30.7 million and $3.1
million, respectively. For 1993, the Company recognized revenues
of $84.8 million and an operating loss of $12.9 million from its
life insurance software, professional and information services
business, which included the results of CYBERTEK since August 24,
1993. Of the loss, $1.7 million 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 increasing the operating loss from the life
insurance services business in the short term.
The information services business produced lower than expected
operating profits for 1993, 1992 and 1991. The Company is
attempting to direct more of its information services business into
data base 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.
The property and casualty insurance software and services
business achieved increased levels of revenue and operating income,
primarily from licensing activities in 1993. This operating income
more than offset the losses in the health and life insurance
services businesses during this period. Outsourcing services for
PAGE <29>
property and casualty insurers did not meet expectations in 1993
due to several contracts not closing or ramping up as fast as
anticipated. The Company believes that this and the slowdown in
second half licensing was largely due to the Company's delay in
releasing the results of its special audit and having available
audited financial statements.
The Company 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).
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 $2.6
million during the twelve months ended December 31, 1993.
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 $1.8 million during the twelve months ended
December 31, 1993 (see Note 1 of Notes to Consolidated Financial
Statements).
Investment income decreased $2.2 million for 1993 compared to
1992, as a result of a lower level of investable funds, resulting
from large cash expenditures for the acquisition of CYBERTEK
Corporation ($59.7 million) in August 1993, the repurchase in April
1993 of 970,668 shares of the Company's common stock ($48.7
million), and to a decrease in interest income related to long-term
accounts receivable.
Interest expense and other charges increased $1.3 million for
1993 compared to 1992, primarily as a result of the amortization of
discounts associated with long-term restructuring liabilities
recorded at June 30, 1993. These liabilities are part of
restructuring charges established to recognize as a loss the
planned future abandonment of certain facilities relating to the
restructuring of the Company's health insurance systems business
(see Note 13 of Notes to Consolidated Financial Statements).
Interest expense decreased $2.7 million for 1992 compared to
1991 as a result of the redemption of the Company's $100 million,
5.5% Convertible Subordinated Debentures in May 1991. Interest
expense relating to this debt was $2.2 million in 1991.
The effective income tax (benefit) rate (income taxes
expressed as a percentage of pre-tax income) was (15.5%), 32.2% and
34.6% for the years ended December 31, 1993, 1992 and 1991,
PAGE <30>
respectively. The effective income tax benefit rate for 1993
includes the impact of the increase in the highest marginal
corporate tax rate resulting from the enactment of the Omnibus
Budget Reconciliation Act of 1993. The effective tax benefit rate
in 1993 is significantly lower than the statutory rate due to the
nontaxable write-off of goodwill ($39.4 million) related to the
impairment of the Company's health insurance systems business (see
Note 13 of Notes to Consolidated Financial Statements). The
decrease in the effective rate between 1992 and 1991 was due
primarily to an increase in nontaxable investment income.
PAGE <31>
Liquidity and Capital Resources
December 31,
1993 1992
(In Millions)
Cash and equivalents and marketable
securities.................................. $156.8 $238.5
Current assets................................ 287.7 343.9
Current liabilities........................... 81.0 57.2
Working capital............................... 206.7 286.7
Cash provided by operations................... 80.8 107.8
Cash used for investing activities............ (38.9) (127.4)
Cash provided (used) by financing activities.. (49.8) 12.2
The Company's financial condition remained strong at December
31, 1993. Working capital was $206.7 million, including cash, cash
equivalents and marketable securities of $156.8 million as compared
to $238.5 million at December 31, 1992, a net decrease of $81.7
million. The principal factors affecting such net decrease were
the acquisition of CYBERTEK Corporation in August 1993 for a total
consideration of $59.7 million and the repurchase in April 1993 of
970,668 shares of the Company's common stock for total
consideration of $48.7 million. Other significant expenditures
during the period included: acquisition of data processing and
communications equipment, support software and office furniture and
equipment ($35.8 million); software product acquisitions and debt
and contingency payments relating to past business acquisitions
($13.6 million); and completion of construction of additional
office and dining facilities at the Company's corporate
headquarters ($2.1 million). The Company completed the 1993
expenditures, including the repurchase of its shares and the
acquisition for cash of CYBERTEK Corporation, without incurring any
indebtedness.
In August 1993, the Company completed its previously announced
acquisition of CYBERTEK Corporation for total cash consideration of
$59.7 million. As a result of acquiring CYBERTEK's broad based
life insurance software systems, the Company changed certain
development plans and, accordingly, $1.4 million of related
deferred life insurance systems' costs were written-off for the
year ended December 31, 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 million, of which $1.3 million was expended in 1993
and $8.5 million is anticipated for all of 1994. The Company
PAGE <32>
expects to generate savings through the closing of CYBERTEK's data
center operations and other cost reductions.
As described more fully above, the Company decided to
restructure its health insurance systems business and take a
restructuring charge of $25.2 million at June 30, 1993. Cash
outlays with respect to the restructuring charges approximated $1.5
million during the year ended December 31, 1993 and approximately
$15.2 million and $7.5 million are anticipated in 1994 and 1995,
respectively.
Significant expenditures anticipated for 1994, excluding any
possible business acquisitions and stock repurchases, are as
follows: acquisition of data processing and communications
equipment, support software and office furniture, fixtures and
equipment ($13.4 million); costs relating to the internal
development of software systems ($35.8 million); and payments
relating to past business acquisitions ($4.6 million).
The Company has historically used the cash generated from
operations for the following: development and acquisition of new
products; acquisition of businesses; and repurchase of the
Company's stock. The Company anticipates that it will continue to
use its cash for all of these purposes in the future and that
projected cash from operations will be able to meet presently
anticipated needs; however, the Company may also consider incurring
debt as needed to accomplish specific objectives in these areas and
for other general corporate purposes.
In May 1994, the Company expended $56.3 million for the
repurchase of 2,278,537 of the 3,797,561 shares of common stock
held by IBM and as of September 2, 1994, expended $22.2 million for
the repurchase, on the open market, of 652,200 shares of its issued
and outstanding common stock, pursuant to a stock repurchase
program (see Note 16 of Notes to Consolidate Financial Statements).
PAGE <33>
Factors That May Affect Future Results
The Company's future operating results may be affected by a
number of factors, including uncertainties relative to economic
conditions; industry factors; the Company's ability to develop and
sell its products profitably; the Company's ability to successfully
increase market share in its core business while expanding its
product base into other markets; and the Company's ability to
effectively manage expense growth relative to revenue growth in
anticipation of continued pressure on gross margins. The Company's
operating results could be adversely affected should the Company be
unable to anticipate customer demand accurately, to introduce new
products on a timely basis, or to effectively manage the impact on
the Company of changes in the insurance marketplace.
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.
A significant portion of both the Company's revenue and its
operating income is derived from initial licensing charges received
as part of the Company's software licensing activities. Because a
substantial portion of these revenues is recorded at the time new
systems are licensed, there can be significant fluctuations from
period to period in the revenues and operating income derived from
licensing activities based upon the timing of the licensing of new
systems.
Because of the foregoing factors, as well as other factors
affecting the Company's operating results, past financial
performance should not be considered to be a reliable indicator of
future performance, and investors should not use historical trends
to anticipate results or trends in future periods.
Seasonality and Inflation
The Company's operations have not proven to be significantly
seasonal, although quarterly revenues and net income could be
expected to vary at times. This is attributable principally to the
timing of customers entering into license agreements with the
Company and fluctuations in the amount of certain information
services used by customers, principally during holiday seasons and
periods of severe weather. The Company is unable to control the
timing of these decisions or fluctuations.
Although the Company cannot accurately determine the amounts
attributable thereto, the Company has been affected by inflation
through increased costs of employee compensation and other
operating expenses. To the extent permitted by the marketplace for
the Company's products and services, the Company attempts to
recover increases in costs by periodically increasing prices.
Additionally, most of the Company's license agreements and long-
term services agreements provide for annual increases in charges.
PAGE <34>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial
Statements and Supplementary Data
Page
Report of Independent Accountants........................ 35
Consolidated Financial Statements and Notes:
Consolidated Statements of Operations for the years
ended December 31, 1993, 1992 and 1991.............. 36
Consolidated Balance Sheets as of
December 31, 1993 and 1992.......................... 37
Consolidated Statements of Changes in
Stockholders' Equity for the years ended
December 31, 1993, 1992 and 1991.................... 38
Consolidated Statements of Cash Flows for the
years ended December 31, 1993, 1992 and 1991........ 39
Notes to Consolidated Financial Statements............. 40
Quarterly Consolidated Results of
Operations............................................. 60
Supplemental Schedules:
Schedule I - Marketable Securities..................... 62
Schedule V - Property and Equipment.................... 63
Schedule VI - Accumulated Depreciation and
Amortization of Property and Equipment.............. 65
Schedule VIII - Valuation and Qualifying Accounts...... 67
Schedule X - Supplementary Income
Statement Information............................... 68
Supplemental schedules other than those listed above are
omitted because of the absence of conditions under which they are
required or because the required information is included in the
consolidated financial statements or in the notes thereto.
PAGE <35>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Policy Management Systems Corporation
We have audited the accompanying consolidated balance sheets of Policy
Management Systems Corporation and subsidiaries as of December 31, 1993 and 1992
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years ended December 31, 1993 and 1992. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As further discussed in Note 2 to the consolidated financial statements,
management discovered certain errors in the Company's previously issued
financial statements. Accordingly, the balance sheet as of December 31, 1992
and the consolidated statements of operations, changes in stockholders' equity
and cash flows for the year ended December 31, 1992 have been restated to
reflect the correction of these errors.
In 1993 lawsuits were filed against the Company and certain of its present
and former officers and directors alleging violation of securities laws as well
as negligent misrepresentation. In addition, the Securities and Exchange
Commission is conducting an investigation into possible violations of Federal
securities laws. These issues are further discussed in Note 8 to the
consolidated financial statements. Management cannot predict the ultimate
impact of these actions on the consolidated financial statements. Accordingly,
no provisions have been made in the consolidated financial statements.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Policy
Management Systems Corporation and subsidiaries as of December 31, 1993 and 1992
and the results of their operations and their cash flows for the years ended
December 31, 1993 and 1992 in conformity with generally accepted accounting
principles.
Atlanta, Georgia Coopers & Lybrand L.L.P.
September 6, 1994
PAGE <36>
<TABLE>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Year Ended December 31,
1993 1992 1991
(Restated) (Restated)
(Unaudited)
(In Thousands, Except Per Share Data)
<S> <C> <C> <C>
Revenues:
Licensing.................................. $ 74,664 $ 73,007 $ 75,988
Services................................... 378,435 416,254 335,168
453,099 489,261 411,156
Costs and Expenses:
Employee compensation and benefits......... 167,678 168,144 157,249
Computer and communications expenses....... 41,856 39,656 30,717
Information services and data
acquisition costs........................ 130,267 92,827 79,282
Other operating costs and expenses......... 109,618 109,663 80,249
Impairment and restructuring charges....... 80,733 - -
530,152 410,290 347,497
Operating income (loss)...................... (77,053) 78,971 63,659
Other Income and Expenses:
Investment income.......................... 9,898 12,073 11,715
Gain on sale of marketable securities...... 3,388 1,046 1,456
Interest expense and other charges......... (2,630) (1,327) (4,054)
10,656 11,792 9,117
Income (loss) before income taxes (benefit).. (66,397) 90,763 72,776
Income taxes (benefit)....................... (10,263) 29,241 25,180
Net income (loss)............................ $(56,134) $ 61,522 $ 47,596
Net income (loss) per share.................. $( 2.46) $ 2.65 $ 2.21
Weighted average number of shares............ 22,858 23,236 21,568
<FN>
See accompanying notes.
</TABLE>
PAGE <37>
<TABLE>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
1993 1992
(As Restated)
(In Thousands,
Except Share Data)
<S> <C> <C>
Assets
Current assets:
Cash and equivalents............................................. $ 24,122 $ 31,959
Marketable securities............................................ 132,650 206,562
Receivables, net of allowance for uncollectible amounts
of $1,817 ($1,630 at 1992).................................... 92,975 86,479
Income tax receivable............................................ 18,764 2,891
Deferred income taxes............................................ 9,491 8,083
Other............................................................ 9,735 7,939
Total current assets.......................................... 287,737 343,913
Property and equipment............................................. 139,029 131,696
Receivables........................................................ 4,716 22,252
Goodwill and other intangible assets............................... 85,969 100,792
Capitalized software costs......................................... 117,513 99,414
Deferred income taxes.............................................. 21,585 2,580
Other.............................................................. 3,254 6,295
Total assets.................................................. $659,803 $706,942
Liabilities
Current liabilities:
Accounts payable and accrued expenses............................ $ 42,256 $ 37,022
Accrued restructuring charges.................................... 9,521 -
Accrued contract termination costs............................... 2,714 4,008
Current portion of long-term debt................................ 6,986 3,670
Unearned revenues................................................ 19,121 11,500
Other............................................................ 383 1,026
Total current liabilities..................................... 80,981 57,226
Long-term debt..................................................... 5,655 6,001
Deferred income taxes.............................................. 74,151 56,112
Accrued restructuring charges...................................... 19,735 -
Other.............................................................. 2,309 8,527
Total liabilities............................................. 182,831 127,866
Commitments and contingencies (Note 8)
Stockholders' Equity
Special stock, $.01 par value, 5,000,000 shares authorized......... - -
Common stock, $.01 par value, 75,000,000 shares authorized,
22,637,021 shares issued and outstanding (23,524,197 at 1992)... 226 235
Additional paid-in capital......................................... 262,167 307,906
Retained earnings.................................................. 216,632 272,766
Foreign currency translation adjustment............................ (2,053) (1,831)
Total stockholders' equity.................................... 476,972 579,076
Total liabilities and stockholders' equity................. $659,803 $706,942
<FN>
See accompanying notes.
</TABLE>
PAGE <38>
<TABLE>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
Unrealized
Addi- Foreign Loss on
tional Currency Marketable
Common Paid-In Retained Translation Equity
Stock Capital Earnings Adjustment Securities Total
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1990,
as previously reported.................... $194 $164,726 $160,783 $ - $ (1,160) $324,543
Effect of restatement
attributable to prior years................ - - 2,865 - - 2,865
Balance, December 31, 1990,
as restated (unaudited).................... 194 164,726 163,648 - (1,160) 327,408
Net income................................... - - 47,596 - - 47,596
Stock issued under incentive
compensation plan.......................... - 1,522 - - - 1,522
Stock options exercised...................... 9 25,270 - - - 25,279
Conversion of convertible debentures......... 28 97,796 - - - 97,824
Increase in carrying value of noncurrent
marketable equity securities............... - - - - 250 250
Balance, December 31, 1991,
as restated (unaudited).................... 231 289,314 211,244 - (910) 499,879
Net income................................... - - 61,522 - - 61,522
Stock options exercised (469,483 shares)..... 4 18,592 - - - 18,596
Transfer of marketable equity securities
to current portfolio....................... - - - - 910 910
Foreign currency translation adjustment...... - - - (1,831) - (1,831)
Balance, December 31, 1992,
as restated................................ 235 307,906 272,766 (1,831) - 579,076
Net loss..................................... - - (56,134) - - (56,134)
Stock options exercised (21,777 shares)...... - 1,062 - - - 1,062
Repurchase of 970,668 shares of common stock. (10) (48,650) - - - (48,660)
Issuance of stock to employee benefit
plan (61,715 shares)....................... 1 1,849 - - - 1,850
Foreign currency translation adjustment...... - - - (222) - (222)
Balance, December 31, 1993................... $226 $262,167 $216,632 $ (2,053) $ - $476,972
<FN>
See accompanying notes.
</TABLE>
PAGE <39>
<TABLE>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31,
1993 1992 1991
(Restated) (Restated)
(Unaudited)
(In Thousands)
<S> <C> <C> <C>
Operating Activities
Net income/(loss)...................................$(56,134) $ 61,522 $ 47,596
Adjustments to reconcile net income/(loss) to
net cash provided by operating activities:
Depreciation and amortization..................... 63,157 51,104 41,538
Deferred income taxes............................. (2,997) 2,178 6,154
Gain on sale of marketable securities............. (3,388) (2,760) (1,456)
Provision for uncollectible accounts.............. 1,768 712 -
Impairment charges................................ 54,890 - -
Changes in assets and liabilities:
Accrued restructuring and lease termination costs. 25,843 - -
Receivables....................................... 19,748 (11,878) (16,632)
Income tax receivable............................. (15,873) (1,774) 3,961
Accounts payable and accrued expenses............. (1,460) (1,108) 6,033
Income taxes payable.............................. 1,327 160 (17)
Other, net.......................................... (6,058) 9,675 (3,550)
Cash provided by operations.................... 80,823 107,831 83,627
Investing Activities
Proceeds from sales/maturities of marketable
securities......................................... 382,973 208,563 118,052
Purchases of marketable securities..................(296,344) (252,046) (146,140)
Acquisition of property and equipment............... (39,272) (56,011) (20,664)
Capitalized internal software development costs..... (24,698) (24,344) (28,713)
Purchased software.................................. (4,336) (5,702) (623)
Proceeds from disposal of property and equipment.... 9,062 4,307 1,705
Business acquisitions............................... (66,261) (2,194) 9,215
Cash used for investing activities............. (38,876) (127,427) (85,598)
Financing Activities
Payments on long-term debt.......................... (3,681) (2,066) (3,169)
Payments on capital lease obligations............... - (467) (1,887)
Issuance of common stock under stock option plans... 690 14,692 18,725
Issuance of common stock to employee benefit plan... 1,850 - -
Repurchase of outstanding common stock.............. (48,660) - -
Cash provided (used) for financing
activities.................................. (49,801) 12,159 13,669
Effect of exchange rate changes on cash............... 17 (213) -
Net increase (decrease) in cash and equivalents....... (7,837) (7,650) 11,698
Cash and equivalents at beginning of period........... 31,959 39,609 27,911
Cash and equivalents at end of period.................$ 24,122 $ 31,959 $ 39,609
Noncash Activities
Long-term debt arising from and assumed in
connection with business acquisition...............$ 6,580 $ 2,187 $ 9,918
Reduction in long-term debt resulting from
conversion of convertible debentures into
common stock....................................... - - (99,983)
Supplemental Information
Interest paid....................................... 1,579 958 5,431
Income taxes paid................................... 13,431 25,126 11,033
<FN>
See accompanying notes.
</TABLE>
PAGE <40>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and the
related consolidated statements of operations, changes in
stockholders' equity and cash flows for the year then ended have
been audited and are restated herein. The consolidated statements
of operations, changes in stockholders' equity and cash flows for
the year ended December 31, 1991 have been restated by the Company,
without audit, to conform to the adjustments to the Company's
retained earnings as of December 31, 1991, 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 period
presented.
Revenue Recognition
The Company's revenues are generated primarily by licensing to
customers standardized insurance software systems and providing
automation and administrative support and information services to
the insurance industry.
Software systems are licensed under the terms of substantially
standard nonexclusive and nontransferable license agreements, which
generally have a noncancelable minimum term of six years and
provide for an initial license charge and a monthly license charge.
The initial license charge, which grants a right to use the
software system currently available at the time the license is
signed, is recognized as revenue upon delivery of the product and
receipt of a signed contractual obligation. The monthly license
charge provides access to Maintenance, Enhancements and Services
Availability (MESA). Under the maintenance provisions of MESA, the
Company provides telephone support and error correction to current
versions of licensed systems. Under the enhancement provisions of
MESA, the Company will provide any additions or modifications to
the licensed systems, which the Company may deliver from time to
time to licensees of those systems if and when they become
generally available. The monthly license charge is recognized as
revenue on a monthly basis throughout the term of the MESA
provision of the license agreement. Services availability allows
customers access to professional services, other than maintenance
PAGE <41>
and enhancements, which are provided under separate arrangements
during the MESA term.
The Company provides professional support services, including
systems implementation and integration assistance and consulting
and educational services, which are available under services
agreements and charged for separately. These services are generally
provided under time and material contracts and in some
circumstances under fixed price arrangements. Under fixed price
contracts, revenue is recognized on the basis of the estimated
percentage of completion of service provided using the cost-to-cost
method. Changes in estimates to complete and losses, if any, are
recognized in the period in which they are determined.
The Company also offers information and outsourcing services
ranging from making available software licensed from the Company on
a remote processing basis from the Company's data centers, to
complete systems management, processing, administrative support and
automated information services through the Company's nationwide
telecommunications network using the Company's data base products.
Outsourcing services are typically provided under contracts having
terms from three to ten years. Revenues from substantially all
outsourcing and information services are recognized at the time the
service is performed.
Marketable Securities
Interest-bearing marketable securities are stated at amortized
cost, which approximates market value. Current marketable equity
securities are stated at the aggregate of lower of cost or market
and a valuation allowance is provided for the excess, if any, of
cost over market. The fair values of marketable securities are
estimated based on quoted market prices for those or similar
investments. Gains or losses on marketable securities are
determined on the specific identification method.
Investment securities with maturities of three months or less
at the time of acquisition are considered cash equivalents.
Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities"
(FAS 115), was issued in May 1993. FAS 115 addresses the accounting
and reporting for investments in equity securities that have
readily determinable fair values and for all investments in debt
securities. FAS 115 is effective for fiscal years beginning after
December 15, 1993; accordingly, the Company adopted provisions of
FAS 115 on January 1, 1994. Adoption of FAS 115 is not anticipated
to have a material impact on the financial statements taken as a
whole.
PAGE <42>
Property and Equipment
Property and equipment, including certain equipment acquired
under capital leases and support software acquired for internal
use, are stated at cost less accumulated depreciation and
amortization. Property and equipment are depreciated on a
straight-line basis over their estimated useful lives. Assets
acquired under capital leases are amortized over the term of the
related lease.
Goodwill and Other Acquired Intangible Assets
Since 1983, the Company has completed 34 business
acquisitions, all of which have been recorded using the purchase
method of accounting. As a result of purchase accounting,
specifically identifiable intangible assets and goodwill are
recorded and amortized over their estimated economic lives or
periods of future benefit. The lives established for these assets
are a composite of many factors which are subject to constant
change because of the nature of the Company's operations. This is
particularly true for goodwill which reflects value attributable to
the going concern nature of acquired businesses, the stability of
their operations, market presence and reputation. Accordingly, the
Company evaluates the continued appropriateness of these lives
based upon the latest available economic factors and circumstances.
Additionally, the Company evaluates the full recoverability of all
long-lived assets including specific intangible assets and goodwill
based upon a comparison of discounted estimated future cash flows
from the related operations with the then corresponding carrying
values of those assets. A rate considered to be commensurate with
the risk involved is used to discount the cash flows.
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 $2.6 million
during the year ended December 31, 1993. Also as part of this
evaluation, the net book value of intangible assets related to the
Company's health insurance services business of $45.7 million, most
of which was goodwill, was written off during the twelve months
ended December 31, 1993 (see Note 13).
PAGE <43>
Other identifiable purchased intangible assets are being
amortized on a straight-line basis over their estimated period of
benefit ranging from 5 to 10 years.
Computer Software
In accordance with Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed" (FAS 86), certain costs incurred in
the internal development of computer software which is to be
licensed to customers and costs of purchased computer software,
consisting primarily of software acquired through business
acquisitions, are capitalized and amortized at the greater of the
amount computed using (i) the ratio that current gross revenues for
a product bear to the total of current and anticipated future gross
revenues of that product or (ii) the straight-line method over the
remaining estimated economic life of the product including the
period being reported on. Costs which are capitalized as part of
internally developed software primarily include direct and indirect
costs associated with payroll, computer time and allocable
depreciation and other direct allocable costs, among others. All
costs incurred prior to the establishment of technological
feasibility have been expensed as research and development costs
during the periods in which they were incurred and amounted to
$2.7, $13.3 and $10.9 million for the years ended December 31,
1993, 1992, and 1991, respectively.
As part of the Company's restatement of its prior years'
retained earnings (see Note 2), additional software costs in the
cumulative amount of $30.5 million ($18.9 million net of tax) were
capitalized as of December 31, 1992 ($28.3 million as of December
31, 1991). A detailed study of all software-related expenditures
dating back to December 15, 1988 indicated significant
misallocation and overexpensing of development costs. This error
relating to under-capitalization of software development costs was
due to certain weaknesses in the Company's then existing cost
accounting and accumulation system which did not capture all
appropriately capitalizable costs as defined in FAS 86. The
additional capitalized costs include both elements of direct and
indirect costs as described above as required by FAS 86. All of
the additional capitalized software costs are related to the
Company's property and casualty business software systems.
Additional development costs relating to the Company's internally
developed Series III life systems were not capitalized because all
the conditions of FAS 86 were not met. No significant software
development costs were capitalized for the Company's health
insurance business since any such costs would have been written off
as part of the impairment and restructuring charges (see Note 13).
The additional capitalized software costs are reflected in the
restated balances (see Note 7).
PAGE <44>
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 $22.4, $20.3 and $18.4
million for the years ended December 31, 1993, 1992 and 1991,
respectively; as a result of the change in estimated life described
above, amortization expense was $1.8 million less than it would
have been for 1993 using the previous four-year life.
Income Taxes
The provision for income taxes and corresponding balance sheet
accounts are determined in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS
109). Under FAS 109, the deferred tax liabilities and assets are
determined based on temporary differences between the bases of
certain assets and liabilities for income tax and financial
reporting purposes. These differences are primarily attributable to
differences in the recognition of depreciation and amortization of
property, equipment and intangible assets and certain software
development costs and revenues.
Net Income Per Share
Net income per share is based upon the weighted average number
of common shares outstanding. Outstanding stock options are common
stock equivalents, but are excluded from the computation of net
income per share since their dilutive effect is not material.
Foreign Currency Translation
The local currencies of the Company's foreign subsidiaries
have been determined to be the functional currencies. Assets and
liabilities of foreign subsidiaries are translated into United
States dollars at current exchange rates and resulting translation
adjustments are included as a separate component of stockholders'
equity. Revenue and expense accounts of these operations are
translated at average exchange rates prevailing during the year.
Transaction gains and losses, which were not material, are included
in the results of operations of the period in which they occur.
PAGE <45>
NOTE 2. RESTATEMENT OF PRIOR YEARS' RESULTS OF OPERATIONS
In August 1993, the Company engaged independent accountants to
conduct a special audit of the Company's 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.
The components, net of related tax effects, of the cumulative
adjustment to retained earnings as of December 31, 1992, are as
follows:
Increase (Decrease) to
Retained Earnings
(In Thousands)
Elimination of revenue related
to a contingent contract
that was cancelled................... $ (820)
Deferral of revenues due to
changes in timing of revenue
recognition.......................... (8,408)
Reduction of expenses due to
capitalization of certain
software costs (see Note 1).......... 18,863
Recognition of expenses due
to changes in timing of
expense accrual...................... (1,622)
Reserve for losses on certain
services contracts................... (5,536)
Reduction of current income tax
liability due to previously
unrecorded tax credits............... 2,580
Cumulative retained earnings
adjustment as of December 31, 1992... $ 5,057
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 1992 audit, the Company determined the
specific prior period or periods in 1992 affected by the above
adjustments and also determined that retained earnings previously
reported as of December 31, 1991 required adjustment.
PAGE <46>
The components (net of related tax effects) of the adjustment
to previously reported net income for the year ended December 31,
1992, are as follows:
Increase (Decrease)
to Net Income
(In Thousands)
Elimination of revenue related
to a contingent contract
that was cancelled............... $ (820)
Deferral of revenues due to
changes in timing of revenue
recognition...................... (2,331)
Reduction of expenses due to
capitalization of certain
software costs (see Note 1)...... 1,557
Recognition of expenses due
to changes in timing of
expense accrual.................. 3,365
Reserve for losses on certain
services contracts............... (2,179)
Reduction of current income tax
liability due to previously
unrecorded tax credits........... 2,580
Net income adjustment for the
year ended December 31, 1992..... $ 2,172
Adjustment per share............... $ .10
The components, net of related tax effects, of the cumulative
adjustment to retained earnings as of December 31, 1991, are as
follows:
(Unaudited)
Increase (Decrease)
to Retained Earnings
(In Thousands)
Deferral of revenues due to
changes in timing of revenue
recognition.......................... $(6,077)
Reduction of expenses due to
capitalization of certain
software costs (see Note 1).......... 17,306
Recognition of expenses due
to changes in timing of
expense accrual...................... (4,987)
Reserve for losses on certain
services contracts................... (3,357)
Cumulative retained earnings
adjustment as of December 31, 1991... $ 2,885
PAGE <47>
The consolidated statements of operations, changes in
stockholders' equity and cash flows for the year ended December 31,
1991 have been restated by the Company, without audit, to conform
to the adjustments to the Company's retained earnings as of
December 31, 1991, as discussed above. These adjustments include
all adjustments which are, in the opinion of management, necessary
to state farily the results for the period presented.
The components (net of related tax effects) of the adjustment
to previously reported net income for the year ended December 31,
1991, are as follows:
Increase (Decrease)
to Net Income
(In Thousands)
Deferral of revenues due to changes in
timing of revenue recognition......... $(1,088)
Reduction of expenses due to
capitalization of certain software
costs (see Note 1).................... 4,668
Recognition of expenses due to changes
in timing of expense accrual.......... (364)
Reserve for losses on certain services
contracts............................. (3,196)
Net income adjustment for the year
ended December 31, 1991............... $ 20
The net income adjustment for the year ended December 31, 1991
had no effect on net income per share as previously reported.
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 beyond
December 31, 1992 and 1991; (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.
NOTE 3. ACQUISITION
On August 24, 1993, the Company consummated the acquisition of
all of the outstanding stock of CYBERTEK Corporation (CYBERTEK) for
an aggregate consideration of $59.7 million 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 to enable its customers to manage their business.
PAGE <48>
The acquisition has been recorded using the purchase method of
accounting. Accordingly, the consolidated statements of operations
of the Company for the year ended December 31, 1993 include the
results of operations of CYBERTEK only from the date of acquisition
through period end. The impact of the acquisition on the
consolidated results of operations for the year ended December 31,
1993 was not significant. 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. MARKETABLE SECURITIES
Marketable securities consist of the following:
December 31,
1993 1992
(In Thousands)
Municipal bonds and notes.............. $127,505 $197,115
U.S. Government and Agency securities.. 4,795 9,072
Equity securities...................... 350 375
Total.............................. $132,650 $206,562
Market value........................... $134,983 $208,334
PAGE <49>
NOTE 5. PROPERTY AND EQUIPMENT
<TABLE>
A summary of property and equipment is as follows:
<CAPTION>
Estimated December 31,
Useful Life 1993 1992
(Years) (In Thousands)
<S> <C> <C> <C>
Cost:
Land...................................... - $ 2,557 $ 2,557
Buildings and improvements................ 10-40 59,618 41,820
Construction in progress.................. - - 15,721
Leasehold improvements.................... 1-10 3,293 3,351
Office furniture, fixtures and equipment.. 5-15 37,630 30,370
Data processing and communications
equipment and support software......... 2-5 134,552 116,135
Other..................................... 3-5 4,002 5,472
241,652 215,426
Less: Accumulated depreciation
and amortization........................ (102,623) (83,730)
Property and equipment..................... $139,029 $131,696
</TABLE>
In mid-1991, the Company began construction of a 176,000
square foot addition to its corporate headquarters which was
completed in early 1993 at a total cost of $16.2 million.
Depreciation and amortization charged to expense was $27.2, $24.1
and $17.8 million for the years ended December 31, 1993, 1992 and
1991, respectively.
NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS
A summary of goodwill and other intangible assets is as
follows:
December 31,
1993 1992
(In Thousands)
Goodwill.........................$ 76,500 $ 90,468
Customer lists................... 27,010 25,905
Covenants not to compete......... 4,956 4,486
Other............................ 3,653 9,268
112,119 130,127
Less: Accumulated amortization.. (26,150) (29,335)
$ 85,969 $100,792
PAGE <50>
Amortization charged to expense was $9.3, $8.4 and $7.1
million for the years ended December 31, 1993, 1992 and 1991,
respectively. See Note 13 for a discussion of the write-off of
certain impaired goodwill and other intangible assets.
NOTE 7. CAPITALIZED SOFTWARE COSTS
A summary of capitalized software costs is as follows:
December 31,
1993 1992
(In Thousands)
Internally developed software..... $124,326 $ 99,628
Purchased software................ 47,655 41,014
171,981 140,642
Less: Accumulated amortization... (54,468) (41,228)
Capitalized software costs........ $117,513 $ 99,414
Purchased software in the amount of $9.2 million (which was
net of $9.2 million of related amortization) was written off as
part of the Company's impairment and restructuring charges relating
to its health business (see Note 13). Also, $1.4 million relating
to the nonrecoverability of certain deferred life insurance systems
development costs was written off for the year ended December 31,
1993; this amount is also included in other operating costs and
expenses in the accompanying consolidated statements of operations.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Commitments
The Company occupies leased facilities under various operating
leases expiring through 2014. The leases for certain facilities
contain options for renewal and provide for escalation of annual
rentals based upon increases in the lessors' operating costs. Rent
expense under leases for facilities was $7.7, $8.7 and $7.5 million
for the years ended December 31, 1993, 1992 and 1991, respectively.
Amounts of $7.8 million for lease termination costs and $12.2
million for lease abandonment charges are included in the
impairment and restructuring charges in the accompanying statement
of operations for the year ended December 31, 1993 (see Note 13).
The Company leases certain data processing and related
equipment primarily under operating leases expiring through 1995.
Rent expense under operating leases for such equipment was $4.3,
$4.3 and $1.0 million for the years ended December 31, 1993, 1992
and 1991, respectively. Future minimum lease obligations under
noncancelable operating leases are stated below and include a lease
termination payment in 1994 amounting to $7.8 million and payments
over 10 years aggregating $17.6 million related to a leasehold
planned for future abandonment (see Note 13):
PAGE <51>
Facilities
Year Ending December 31, (In Thousands)
1994............................ $14,789
1995............................ 4,957
1996............................ 4,472
1997............................ 3,724
1998............................ 6,900
Thereafter...................... 11,672
Total............................. $46,514
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 is 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.
The maximum insurance coverage related to these claims is $15
million under the directors' and officers' insurance.
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 this investigation.
NOTE 9. LONG-TERM DEBT
Long-term debt is as follows:
December 31,
1993 1992
(In Thousands)
Notes payable, due through
February 2015, interest at
3.69% to 9.00%................. $12,641 $ 9,671
Less: Current portion............ (6,986) (3,670)
Long-term debt................... $ 5,655 $ 6,001
PAGE <52>
NOTE 10. INCOME TAXES
A reconciliation of the difference between the actual income
tax provision (benefit) and the expected provision (benefit),
computed using the applicable statutory rate is as follows:
Year ended December 31,
1993 1992 1991
(Restated) (Restated)
(Unaudited)
Statutory Rate 35% 34% 34%
(In Thousands)
Income tax provision (benefit)
computed at statutory rate.......$(23,239) $ 30,859 $ 24,744
Increase (decrease) in taxes due to:
Goodwill......................... 15,205 1,094 1,119
Nontaxable investment income..... (2,391) (3,336) (2,823)
State and local income taxes,
net of federal tax effect...... (913) 489 2,140
Increase in statutory rate....... 1,080 - -
Other............................ (5) 135 50
Actual income tax
provision (benefit)..............$(10,263) $ 29,241 $ 25,180
Effective income tax provision
(benefit) rate................... (15.5)% 32.2% 34.6%
An analysis of the income tax provision (benefit) is as
follows:
Year ended December 31,
1993 1992 1991
(Restated) (Restated)
(Unaudited)
(In Thousands)
Current taxes.....................$ (7,266) $27,063 $ 19,023
Deferred income taxes relating to
temporary differences:
Depreciation and amortization
of property, equipment and
intangibles................... 3,834 (1,907) (345)
Capitalized internal software
development costs........... 4,914 4,458 5,107
Restructuring of operations... (12,855) - -
Other......................... 1,110 (373) 1,395
(2,997) 2,178 6,157
Total income tax
provision (benefit).........$(10,263) $29,241 $25,180
PAGE <53>
An analysis of the net deferred income tax liability is as
follows:
December 31,
1993 1992
(In Thousands)
Current deferred assets:
Net operating loss carryforward....... $4,315 $ 157
Other................................. 5,176 7,926
Current deferred assets............. 9,491 8,083
Long-term deferred assets:
Restructuring of operations.......... 12,855 -
State tax credits.................... 4,987 2,580
Other................................ 3,743 -
Long-term deferred assets............ 21,585 2,580
Total deferred assets.............. $31,076 $10,663
Long-term deferred liabilities:
Depreciation and amortization of
property, equipment
and intangibles.................... $28,272 $23,726
Capitalized internal software
development costs.................. 32,971 28,073
Other................................ 12,908 4,313
Total deferred liabilities......... $74,151 $56,112
The Company generated a $10.9 million net operating loss for
the year ended December 31, 1993 for tax purposes. This loss,
which is anticipated to be carried forward, will expire in 2008.
Additionally, the Company has loss carryforwards of $1.5 million at
December 31, 1993 related to a business acquisition in 1991. The
acquired loss carryforwards are subject to a $.4 million annual
limitation and will expire in 2002. The entire benefit related to
the Company's loss carryforwards has been recognized in the
consolidated financial statements.
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 FAS 109, deferred tax liabilities and assets are
adjusted for the effect of a change in tax laws or rates.
Furthermore, the effect is included in the income tax provision for
the reporting period that includes the enactment date. As such,
the net loss for the period ended December 31, 1993 was increased
by $1.1 million to reflect the increase in tax rates.
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 $17.8 million for those years. The Company believes that
PAGE <54>
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 11. EMPLOYEE BENEFIT PLANS
Profit Sharing Retirement Plan
Eligible employees of the Company are covered under the
Company's profit sharing retirement plan. The Company's
contribution to the plan is determined by the Board of Directors of
the Company. Employees make no contributions to this plan. The
Company made contributions of $.8 million in early 1993 and $.7
million in early 1992 for the plan years 1992 and 1991,
respectively. No contribution was made for 1993.
Retirement Savings Plan
The Company offers a 401(k) retirement savings plan for
eligible employees. Participants can elect to have up to 6% of
their salary withheld for investment in the program and the Company
will make a matching contribution of $.50 for each $1.00 of
employee participation. Participants may also make limited
additional contributions which are not subject to matching
contributions by the Company. Participants have several options
as to how their contributions may be invested, but through
October 1993, all matching contributions had been invested in
common stock of the Company. Company contributions made after
October 1993 were, and continue to be, invested in a government
money market fund, except as participants may otherwise redirect
such Company contributions previously made. Except in certain
instances, participant contributions are made from pre-tax wages.
The Company's contribution on behalf of participating employees
was $1.9, $1.9 and $1.7 million for the years ended December 31,
1993, 1992 and 1991, respectively.
Stock Option Plans
The Company has various plans under which options to purchase
shares of the Company's common stock have been granted to eligible
employees and members of the Board of Directors of the Company. In
1992, options were granted under the 1989 Stock Option Plan to
eligible employees and members of the Board of Directors, subject
to approval by the Company's stockholders of an amendment to
increase the number of shares available for grant under that plan.
In January 1993, options were also granted under the Company's 1993
Long-Term Incentive Plan for eligible executives, subject to
approval by the Company's stockholders. At the annual meeting of
the Company's stockholders in April 1993, the amendment to the 1989
Stock Option Plan and the 1993 Long-Term Incentive Plan for
Executives were approved.
PAGE <55>
Option activity under all of the stock option plans is
summarized as follows:
Year Ended December 31,
1993 1992 1991
(Unaudited)
Shares under option at beginning
of year.......................1,202,856 1,295,297 1,789,938
Granted.......................... 592,500 396,300 390,200
Exercised........................ (21,777) (469,483) (823,665)
Forfeited........................ (48,460) (19,258) (61,176)
Shares under option at
end of year....................1,725,119 1,202,856 1,295,297
Shares under option exercisable
at end of period............... 766,805 443,297 569,759
Shares available for
future grant...................1,175,916 996,939 74,565
The exercise price of options exercised under plans other than
under the 1993 Long-Term Incentive Plan for Executives during the
years ended December 31, 1993, 1992 and 1991, were $15.13 to $49.63
and the exercise prices of shares under option at December 31,
1993, 1992 and 1991, other than under the 1993 Long-Term Incentive
Plan for Executives, were $15.13 to $69.38.
All options granted under plans other than under the 1993
Long-Term Incentive Plan for Executives have exercise prices at
100% of market value at date of grant and are exercisable at the
rate of 33 1/3% per year (cumulative) beginning one year from date
of grant.
Options granted in 1993 under the 1993 Long-Term Incentive
Plan for Executives have been granted at 105% of market value at
the date of grant; all these options have an exercise price of
$81.90. (For individuals who later may be selected to participate
in the 1993 Long-Term Incentive Plan for Executives, said
percentage is based on the year the individual is selected as
follows: 1993 - 105%; 1994 - 104%; 1995 - 103%; 1996 - 102%; 1997 -
101%; and 1998 - 100%.) Options granted under the plan in 1993
become exercisable as follows: 25% on January 1, 1995; 25% on
January 1, 1997; and 50% on January 1, 1999. For individuals who
later may be selected to participate in the plan, the number of
options granted and what percentage become exercisable on the above
dates are determined according to formulas described in the plan.
PAGE <56>
NOTE 12. CERTAIN TRANSACTIONS
In August 1989, International Business Machines Corporation
("IBM") acquired directly from the Company a 19.8% interest in the
Company's outstanding voting stock for $116.8 million representing
3,797,561 shares. IBM was entitled to increase its ownership
interest up to a maximum of 30% by purchasing the Company's common
stock in the open market. IBM's ownership interest was 16.8% at
December 31, 1993, representing the original 3,797,561 shares
acquired (see Note 16).
Certain officers of the Company participated in the Company's
Long-Term Incentive Plan for executives, which began January 1,
1987 and ended December 31, 1992. The plan provided for the
payment of pre-established bonuses, payable either in cash, common
stock of the Company or a combination thereof, if certain earnings
per share performance goals were reached by the Company during the
six-year life of the plan. Bonuses earned under this plan for the
final two-year period ended December 31, 1992, were paid in 1993,
in a combination of $5.4 million in cash and 45,348 shares of
common stock.
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 $48.7 million.
NOTE 13. IMPAIRMENT AND 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 $33 million 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 systems 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 insurance services products,
primarily those acquired in business acquisitions, would require
PAGE <57>
substantial modification or complete reformation. This
determination and the continuing adverse impact of operating losses
in its health insurance systems business led the Company to the
conclusion that the current carrying value of certain assets of the
health insurance systems business unit, principally intangibles
associated with traditional indemnity insurance plan services, was
not fully recoverable through sale or continuing operations.
Accordingly, the Company recorded an impairment charge of $54.9
million at June 30, 1993 to reduce the carrying value of certain
long-lived identifiable intangible assets ($6.3 million - customer
lists, covenants not to compete and assembled workforce), acquired
software ($9.2 million) and goodwill ($39.4 million) related to its
health business.
The Company applied its methodology for determining impairment
of intangibles (see Note 1) 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 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
business, the Company decided to restructure this business and
recorded a restructuring charge of $25.2 million at June 30, 1993.
Costs to restructure the health insurance services business are
composed of $5.2 million associated with employee severance and
outplacement, and $20.0 million 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 $.6 million. It is anticipated
that these restructurings will be completed during 1994.
NOTE 14. SEGMENT INFORMATION
The Company operates in one business segment, providing
computer software systems and related automation and administrative
support and information services to the insurance industry.
Approximately 90% of the Company's revenues are generated from
products and services provided in the United States and no one
customer accounted for more than 10% of revenues during the year
ended December 31, 1993.
PAGE <58>
NOTE 15. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash
equivalents, marketable securities and trade receivables. The
Company places its cash and cash equivalents and marketable
securities with high credit quality entities and limits the amount
of credit exposure with any one entity. In addition, the Company
performs ongoing evaluations of the relative credit standing of
these entities, which are considered in the Company's investment
strategy.
Concentration of credit risk with respect to trade accounts
receivable are generally diversified due to the large number of
entities comprising the Company's customer base across the
insurance industry. The Company performs ongoing credit
evaluations on certain of its customers' financial condition, but
generally does not require collateral to support customer
receivables. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information.
NOTE 16. SUBSEQUENT EVENTS
In July 1994, the Company received a decision from an
international arbitration tribunal relating to a contract
termination dispute, finding that both parties were responsible.
The Company has made provision (at June 1994) for satisfaction of
the award in the amount of $1.9 million.
The Company announced on April 27, 1994, that it had agreed
with IBM to repurchase 2,278,537 of the 3,797,561 shares of the
Company's common stock held by IBM and that the remainder of the
Company's shares owned by IBM would be purchased by the General
Atlantic Partners group, a New York-based private investment firm.
The Company completed the repurchase of these shares on May 16,
1994, at a share price of $24.71, which approximated an aggregate
cash expenditure of $56.3 million. The shares repurchased by the
Company represent 10% of its total shares outstanding prior to the
repurchase.
Pursuant to a stock repurchase program approved by the Board
of Directors in July 1994, the Company may purchase from time to
time up to 2.5 million shares of its issued and outstanding common
stock. This program is flexible as to the timing and method of
acquisition of these shares. As of September 2, 1994, the Company
had repurchased, on the open market, 652,200 shares of its common
stock for a total of $22.2 million.
PAGE <59>
In addition to the litigation described in Note 8, the Company
is presently involved in litigation and a contract dispute arising
out of the Company's change in the direction of its future life
software systems development following the acquisition of CYBERTEK.
There are also various other litigation proceedings and claims
arising in the ordinary course of business. The Company believes
it has meritorious defenses and is vigorously defending these
matters. While the resolution of these matters could affect the
results of operations in future periods, the Company does not
expect these matters to have a material adverse effect on its
consolidated financial position or results of operations. The
Company, however, is unable to predict the ultimate outcome or the
potential financial impact of these matters.
PAGE <60>
QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS
(Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In Thousands, Except Per Share Data)
1993 (Restated First Quarter Only):
Revenues............................ $119,215 $116,708 $108,885 $108,291
Operating income (loss)............. 15,317 (97,465) 752 4,343
Other income and expenses, net...... 5,926 2,015 1,333 1,382
Income (loss) before income
taxes (benefit)................... 21,243 (95,450) 2,085 5,725
Net income (loss)................... $ 13,625 $(74,048) $ 346 $ 3,943
Net income (loss) per share......... $ .58 $ (3.27) $ .02 $ .17
1992 (Restated):
Revenues............................ $117,448 $121,239 $124,086 $126,488
Operating income.................... 17,713 20,222 20,849 20,187
Other income and expenses, net...... 2,793 2,840 3,212 2,947
Income before income taxes.......... 20,506 23,062 24,061 23,134
Net income.......................... $ 13,840 $ 15,485 $ 16,143 $ 16,054
Net income per share................ $ .60 $ .67 $ .69 $ .69
1992 (As Previously Reported):
Revenues............................ $116,078 $123,119 $126,371 $131,544
Operating income.................... 18,324 19,326 20,147 21,744
Other income and expenses, net...... 2,784 2,809 3,215 3,075
Income before income taxes.......... 21,108 22,135 23,362 24,819
Net income.......................... $ 13,715 $ 14,395 $ 15,168 $ 16,072
Net income per share................ $ .59 $ .62 $ .65 $ .69
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. 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. The Company has
determined the specific prior periods affected by these adjustments
and has restated its financial statements for such periods (see
Note 2 of Notes to Consolidated Financial Statements).
PAGE <61>
The results of operations for the three months ended June 30,
1993 reflect special impairment and restructuring charges of $80.7
million (after taxes, $65.0 million, or $2.87 per share). See Note
13 of Notes to Consolidated Financial Statements. Additionally,
the Company recorded charges related to early project terminations,
the deductible under the Company's Directors' and Officers'
liability insurance policy in response to shareholder litigation,
costs overruns on certain projects and other charges arising from
the Company's previously disclosed internal investigation of its
accounting practices of approximately $.5 million (after taxes $.3
million, or $.01 per share) and approximately $17.6 million (after
taxes $10.9 million, or $.48 per share), for the three months ended
March 31, and June 30, 1993, respectively.
PAGE <62>
SCHEDULE I
POLICY MANAGEMENT SYSTEMS CORPORATION
MARKETABLE SECURITIES
December 31, 1993
Maturity Amortized Market Book
Description Value Cost Value Value
(In Thousands)
3.24% - 11.0% Municipal bonds
and notes, maturing on various
dates through December 1998
(all rated AA- or better)........ $122,189 $127,505 $129,702 $127,505
5.29% - 9.50% U.S. Government and
Agency securities, maturing on
various dates through November
1994............................. 4,698 4,795 4,931 4,795
200,000 shares, The Seibels Bruce
Group, Inc. common stock,
par value $1 per share........... - - 350 350
$126,887 $132,300 $134,983 $132,650
PAGE <63>
SCHEDULE V
POLICY MANAGEMENT SYSTEMS CORPORATION
PROPERTY AND EQUIPMENT
Balance Addi-
At tions Other Balance
Beginning At Retire- Changes At End
of Year Cost ments (1) of Year
(In Thousands)
Year ended
December 31, 1993:
Land and improvements...... $ 2,557 $ - $ - $ - $ 2,557
Buildings.................. 41,820 1,347 - 16,451 59,618
Construction in progress... 15,721 730 - (16,451) -
Leasehold improvements..... 3,351 269 (682) 355 3,293
Office furniture,
fixtures and equipment... 30,370 5,987 (201) 1,474 37,630
Data processing and
communications equipment
and support software..... 116,135 29,983 (14,689) 3,123 134,552
Other...................... 5,472 956 (2,206) (220) 4,002
$215,426 $39,272 $(17,778) $ 4,732 $241,652
Year ended
December 31, 1992:
Land and improvements...... $ 2,557 $ - $ - $ - $ 2,557
Buildings.................. 41,680 157 - (17) 41,820
Construction in progress... 6,277 9,444 - - 15,721
Leasehold improvements..... 2,718 1,012 (542) 163 3,351
Office furniture,
fixtures and equipment... 27,612 2,451 (558) 865 30,370
Data processing and
communications equipment. 108,321 27,146 (18,225) (1,107) 116,135
Other...................... 5,095 1,901 (1,513) (11) 5,472
$194,260 $42,111 $(20,838) $ (107) $215,426
Note
(1) Includes assets acquired through business acquisitions, foreign currency
translation adjustments, transfers and other adjustments.
PAGE <64>
POLICY MANAGEMENT SYSTEMS CORPORATION
PROPERTY AND EQUIPMENT
(RESTATED)
(UNAUDITED)
Balance Addi-
At tions Other Balance
Beginning At Retire- Changes At End
of Year Cost ments (1) of Year
(In Thousands)
Year Ended
December 31, 1991:
Land and improvements...... $ 2,557 $ - $ - $ - $ 2,557
Buildings.................. 40,964 720 (3) (1) 41,680
Construction in progress... 110 6,167 - - 6,277
Leasehold improvements..... 2,671 47 - - 2,718
Office furniture,
fixtures and equipment... 25,398 2,331 (97) (20) 27,612
Data processing and
communications equipment
and support software..... 88,253 26,147 (10,143) 4,064 108,321
Other...................... 5,377 153 (557) 122 5,095
$165,330 $35,565 $(10,800) $4,165 $194,260
Note
(1) Includes assets acquired through business acquisitions, foreign currency
translation adjustments, transfers and other adjustments.
PAGE <65>
SCHEDULE VI
POLICY MANAGEMENT SYSTEMS CORPORATION
ACCUMULATED DEPRECIATION AND
AMORTIZATION OF PROPERTY AND EQUIPMENT
Balance Addi-
At tions Other Balance
Beginning To Retire- Changes At End
of Year Expense ments (1) of Year
(In Thousands)
Year ended
December 31, 1993:
Buildings.................. $ 7,618 $ 1,699 $ - $ - $ 9,317
Leasehold improvements..... 1,838 349 (349) - 1,838
Office furniture,
fixtures and equipment... 15,418 2,832 (175) 8 18,083
Data processing and
communications equipment
and support software..... 55,417 21,719 (7,189) 167 70,114
Other...................... 3,439 585 (493) (260) 3,271
$83,730 $27,184 $ (8,206) $ (85) $102,623
Year ended
December 31, 1992:
Buildings.................. $ 6,414 $ 1,203 $ - $ - $ 7,617
Leasehold improvements..... 1,843 495 (506) (8) 1,824
Office furniture,
fixtures and equipment... 13,102 2,590 (528) 269 15,433
Data processing and
communications equipment
and support software..... 50,736 19,346 (14,270) (396) 55,416
Other...................... 4,257 475 (1,289) (3) 3,440
$76,352 $24,109 $(16,593) $(138) $ 83,730
Note
(1) Includes foreign currency translation adjustments, transfers and other
adjustments.
PAGE <66>
POLICY MANAGEMENT SYSTEMS CORPORATION
ACCUMULATED DEPRECIATION AND
AMORTIZATION OF PROPERTY AND EQUIPMENT
(RESTATED)
(UNAUDITED)
Balance Addi-
At tions Other Balance
Beginning To Retire- Changes At End
of Year Expense ments (1) of Year
(In Thousands)
Year ended
December 31, 1991:
Buildings.................. $ 5,228 $ 1,189 $ (3) $ - $ 6,414
Leasehold improvements..... 1,354 450 - 39 1,843
Office furniture,
fixtures and equipment... 11,087 2,274 (10) (249) 13,102
Data processing and
communications equipment
and support software..... 45,938 13,443 (8,657) 12 50,736
Other...................... 4,298 491 (538) 6 4,257
$67,905 $17,847 $ (9,208) $(192) $ 76,352
Note
(1) Includes foreign currency translation adjustments, transfers and other
adjustments.
PAGE <67>
SCHEDULE VIII
POLICY MANAGEMENT SYSTEMS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance Charged
at to Balance
Beginning Costs & (1) at End
Description of Period Expenses Other Deductions of Period
(In Thousands)
Allowance for
uncollectible
amounts
Year ended
December 31, 1993 $1,630 1,768 601 (2,182) $ 1,817
Accrued restruct
- -uring and lease
termination cost
Year ended
December 31, 1993 $ 0 29,696 0 (440) $29,256
Note
(1) Acquired through business acquisition.
PAGE <68>
SCHEDULE X
POLICY MANAGEMENT SYSTEMS CORPORATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION
Year ended December 31,
1993 1992 1991
(Restated) (Restated)
(Unaudited)
(In Thousands)
Amortization of intangible assets:
Computer software................$24,844 $22,068 $19,225
Intangible assets from business
acquisitions................... 9,274 8,527 7,137
Maintenance and repairs............ 8,118 8,558 4,646
$42,236 $39,153 $31,008
PAGE <69>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Item 4 of the Company's Report on Form 8-K, dated August 17,
1993, is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information other than the listing of Executive Officers of
the Company, which is set forth in Part I of this Form 10-K, is
contained under the heading "Election of Directors" in the
Company's 1994 Proxy Statement and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The section of the Company's 1994 Proxy Statement titled
"Compensation Plans and Arrangements" is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The sections of the Company's 1994 Proxy Statement titled
"Principal Stockholders" and "Election of Directors" are
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section of the Company's 1994 Proxy Statement titled
"Certain transactions" is incorporated herein by reference.
PAGE <70>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
Financial Statements and Schedules
See Index to Consolidated Financial Statements and
Supplementary Data on page 34.
Exhibits Filed
Exhibits required to be filed with this Annual Report on Form
10-K are listed in the following Exhibit Index.
Pursuant to Rule 15d-21 promulgated under the Securities
Exchange Act of 1934, the following annual report for the Company's
employee stock purchase plan will be furnished to the Commission
when the information becomes available:
Form 11-K for the Company's 401(k) Retirement Savings Plan for
the year ended December 31, 1993 is incorporated herein by
reference.
Form 8-K
The Company filed a report on Form 8-K, dated December 8, 1993
under Item 5. Other events, relating to a letter issued to the
Company's stockholders, customers and employees, advising them of
recent developments in connection with the Company's audit and its
business.
PAGE <71>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Policy Management Systems Corporation
Our report, which includes two emphasis paragraphs discussing
errors in previously issued financial statements and litigation and
a Securities and Exchange Commission investigation, on the
consolidated financial statements of Policy Management Systems
Corporation and subsidiaries is included on page 35 of this Form
10-K. In connection with our audits of such financial statements,
we have also audited the related 1993 and 1992 financial statement
schedules listed in the index on page 34 of this Form 10-K.
In our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material
respects, the information required to be included therein.
Atlanta, Georgia Coopers & Lybrand L.L.P.
September 6, 1994
PAGE <72>
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.
(REGISTRANT) POLICY MANAGEMENT SYSTEMS CORPORATION
BY (SIGNATURE) /s/ Timothy V. Williams
Timothy V. Williams, Executive Vice
President, Chief Financial Officer
DATE November 16, 1994
BY (SIGNATURE) /s/ Stan F. Stoudenmire
Stan F. Stoudenmire, Vice President
and Corporate Controller
DATE November 16, 1994
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
BY (SIGNATURE) /s/ G. Larry Wilson
(NAME AND TITLE) G. Larry Wilson, Chairman of the Board of
Directors, President and Chief Executive
Officer
DATE November 16, 1994
BY (SIGNATURE) /s/ Roy L. Faulks
(NAME AND TITLE) Roy L. Faulks, Vice Chairman of the
Board of Directors
DATE November 16, 1994
BY (SIGNATURE) /s/ John P. Seibels
(NAME AND TITLE) John P. Seibels, Director
DATE November 16, 1994
BY (SIGNATURE) /s/ Frederick B. Karl
(NAME AND TITLE) Frederick B. Karl, Director
DATE November 16, 1994
BY (SIGNATURE) /s/ Richard G. Trub
(NAME AND TITLE) Richard G. Trub, Director
DATE November 16, 1994
PAGE <73>
SIGNATURES
BY (SIGNATURE) /s/ Joseph D. Sargent
(NAME AND TITLE) Joseph D. Sargent, Director
DATE November 16, 1994
BY (SIGNATURE) /s/ Dr. John M. Palms
(NAME AND TITLE) Dr. John M. Palms, Director
DATE November 16, 1994
BY (SIGNATURE) Did not sign.
(NAME AND TITLE) Joseph M., Director
DATE November 16, 1994
BY (SIGNATURE) Did not sign.
(NAME AND TITLE) Steven A. Denning, Director
DATE November 16, 1994
PAGE <1>
POLICY MANAGEMENT SYSTEMS CORPORATION
EXHIBIT INDEX
Exhibit
Number
22. SUBSIDIARIES OF THE REGISTRANT
(Filed herewith)
24. CONSENTS OF EXPERTS AND COUNSEL
Consent of Coopers & Lybrand (Filed herewith)
PAGE <1>
EXHIBIT 22
LIST OF SUBSIDIARIES
OF POLICY MANAGEMENT SYSTEMS CORPORATION
(Jurisdiction of Incorporation)
Policy Management Systems Canada, Ltd. (Canada)
Policy Management Systems International, Ltd. (Delaware)
Policy Management Corporation (South Carolina)
Policy Management Systems Netherlands B.V. (The
Netherlands)
Policy Management Systems (Barbados), Ltd. (Barbados)
Policy Management Systems Europe, Limited (England)
P.M.S., Inc. d/b/a Telepro, Telefacts and Legal Facts
(Texas)
Policy Management Systems Australia Pty. Limited
(Australia)
Policy Management Systems Information and Administration
Services, Inc. (South Carolina)
Portsmouth I.T. Services Limited (England)
Policy Management Systems (Germany) GmbH (Germany)
Policy Management Systems Life, Inc. (South Carolina)
Policy Management Systems Osterreich GmbH (Austria)
Policy Management Systems Investment, Inc. (Delaware)
Medical Correspondence Service, Inc. (Georgia)
CYBERTEK Management Services, Inc. (California)
CYBERTEK Corporation (Texas)
CYBERTEK Computer Products International, Inc.
(California)
CYBERTEK Agency Services, Inc. (Texas)
CYBERTEK LAN Software, Inc. (California)
PAGE <2>
CYBERTEK Solutions, Inc. (Texas)
CYBERTEK-Cogensys, Inc. (Delaware)
Policy Management Systems Norden A.S. (Norway)
Myers and Boles Corporation (California)
PAGE <1>
EXHIBIT 24
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of Policy Management Systems Corporation ("Company") on
Form S-8 (Nos. 33-33848, 33-35002 and 33-35917) of our report,
which includes two emphasis paragraphs discussing errors in
previously issued financial statements and litigation and a
Securities and Exchange Commission investigation, dated April 5,
1994 on our audits of the consolidated financial statements and
financial statement schedules of the Company as of December 31,
1993 and 1992, and for the twelve months ended December 31, 1993,
which report is included in this Annual Report on Form 10-K.
Atlanta, Georgia Coopers & Lybrand
April 5, 1994
