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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995 Commission file number 1-10557
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 PMSC 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
New York Stock Exchange
Title of each class on which registered
Common Stock, par value $.01 per share
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 X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $828,522,784 at March 19, 1996 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 19, 1996 was 19,489,871.
DOCUMENTS INCORPORATED BY REFERENCE
Specified sections of the registrant's 1996 Proxy Statement in connection with
its 1996 Annual Meeting of Stockholders are incorporated by reference in Part
III hereof.
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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 worldwide insurance industry, is a South Carolina
corporation incorporated in 1980.
Prior to 1985, the Company operated primarily as a provider of insurance
software systems and related automation support services to the property and
casualty insurance market in the United States and Canada. Since that time
the Company has expanded geographically into Europe, Australia and Asia, as
well as into the life and health insurance markets and the information
services market. However, as a result of certain changes in the health
insurance market, the Company has ceased doing business in this market and
focused principally on the needs of property and casualty and life insurers.
The Company has also further expanded its software product and services
offerings through client/server computing, strategic alliances, outsourcing
and acquisitions, thereby strengthening the Company's ability to serve the
global insurance marketplace.
Geographic Expansion
The Company initially determined that developing international customers and
marketplaces was essential to becoming a leading provider of insurance
solutions and systems to the worldwide insurance industry. The Company opened
its Canadian office in 1977, and since that time has expanded operations to
include several European countries and the Pacific region. The Company
currently has international customers in 30 different countries (see Segment
Information).
Beginning in 1993, the Company significantly increased its presence in
European markets through certain strategic acquisitions (see Acquisitions). In
December 1993, the Company acquired Norwegian-based Vital Data A.S. ("Vital
Data"), which provided the Company with an important outsourcing center as
well as a development center for the Company's European life systems. In
December 1994, the Company acquired London, England based Creative Holdings
Group, Limited ("Creative"), which strengthened the Company's position in the
European, Australian and Southeast Asian markets by providing the Company with
a significant customer base of medium-sized general insurance companies, as
well as proven technology already being utilized in these markets. Finally, in
October 1995, the Company purchased micado Beteiligungs-und Verwaltungs GmbH
("micado"), a provider of software and services to German insurance and
financial services companies, further strengthening the Company's European
presence as well as providing the Company with expertise in object-oriented
technology.
Client/Server Technology
Prior to 1989, the Company offered insurance software systems to the property
and casualty insurance industry designed to run on traditional mainframe,
midrange and personal computers. In 1987, the Company began development of an
integrated relational database client/server solution for the insurance
industry known as Series III. Using relational databases and cooperative
processing between hardware platforms and allowing access to data from
multiple sources through advanced networks, Series III provides a flow of
information between insurance agents, branch offices and the home office of
insurance companies. With the completion of Release 7 in 1995, Series III,
with the exception of workers' compensation insurance, is a comprehensive
solution for all facets of the property and casualty insurance industry
worldwide. The continued development of Series III will incorporate workers'
compensation insurance functionality, object-oriented technology and
functionality on Microsoft 32-bit operating systems (Windows NT and Windows
95). The Company also continues to provide solutions to the property and
casualty insurance industry through its Series II products, an earlier
generation of solutions which are traditional mainframe or personal computer
products, which have recently been enhanced to accommodate processing dates
for the year 2000 and beyond.
The Point System, the Company's midrange solution for the United States and
Latin American property and casualty insurance market is being re-engineered
to produce client/server capabilities featuring a graphical user interface
GUI-based client and application for multiple servers. A re-engineered Point
System under development, internally known as Point Open, will utilize
object-oriented techniques and will be offered on multiple platforms.
Creative's Insure/90, an AS/400 based product, became part of the Company's
general insurance software solution to the European, Australian and Pacific
Rim markets. Currently under development is Insure Plus, an enhancement to the
Insure/90 product, which will increase functionality and offer client/server
capabilities and object-oriented technology.
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The Company's acquisition of CYBERTEK Corporation ("CYBERTEK") in August,
1993 (see Acquisitions) provided the Company with the CK/4 Enterprise
Solution, an integrated solution for the life insurance industry. In March
1995, the Company made generally available the first release of CyberLife, an
integration of Cybertek functionality with client/server technology.
CyberLife's scalable platform choices include client processes executing on
Windows 3.1, Windows 95, Windows NT or OS/2 and will include server processes
on IBM Mainframe Hardware, UNIX, OS/2 WARP or Windows NT.
Strategic Alliances
To expand its software product and services offerings, the Company has formed
certain strategic alliances. For example, the Company's efforts on Series III
development were enhanced by a Development and Marketing Agreement between the
Company and International Business Machines Corporation ("IBM"). The Company
has also entered into Value-Added Reseller and Industry Remarketer agreements
with IBM for the AS/400 business computer system in conjunction with the
Company's midrange POINT system.
The Company also supports an open systems strategy, which allows the host-
based components of Series III to be
portable across other technology platforms. The Company's alliance with NCR
Corporation ("NCR"), formerly AT&T Global Information Solutions, in 1994
resulted in the general availability of Series III technology for the full
range of scalable UNIX-based platforms provided by NCR (see Product
Development).
As part of the open systems initiative, the Company joined Oracle's Business
Alliance Program, Sybase's Open Solutions Partners Program and in January
1996, joined Microsoft's Solution Developer Program. As Value-Added Resellers
for both Oracle and Sybase, the Company positioned itself for developing its
solutions to the insurance industry based on customer demand.
Outsourcing
In 1987, the Company began to place more emphasis on the outsourcing services
market for both the private and public sectors, and today provides a full
range of outsourcing services. These services range from providing processing
for highly regulated lines of business to furnishing complete processing
capabilities for all of an insurer's business. The Company has also added
complete systems management, systems maintenance, facilities management and
processing.
An important sector of the Company's outsourcing business is Total Policy
Management ("TPM"). Unlike traditional outsourcing that focuses on information
systems, TPM combines automation, information and policy processing to provide
the highest level of outsourcing to insurance companies. During 1995, the
Company began providing such services to life insurers. These life insurance
services, known as CyberSourcing are designed to streamline customer
operations and lower customer overhead costs. CyberSourcing includes
third-party administration, facilities management and other service offerings.
The Company provides outsourcing services from data centers located in North
America, Europe and Australia.
Acquisitions
During 1985, the Company initiated an expansion into the property and casualty
information services business to assist insurers in risk selection, pricing
and claims adjusting. By 1988, through acquisitions of regional providers of
these information services, the Company had developed a nationwide network to
provide the full range of information services. These services were further
expanded from 1990 through 1994, with the acquisition of companies that
provide information services primarily related to the life and health
insurance industries.
Between 1986 and 1989, the Company, through business acquisitions, took
initial steps towards becoming a major supplier of automation solutions for
the life insurance markets. Since then, the Company has continued to expand
its product and services offerings and in August 1993, acquired 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 components of the Company's Series III industry applications.
In 1993, the Company acquired Vital Data in Bergen, Norway to expand the
Company's international growth into the Scandinavian countries of Norway,
Finland, Sweden, and Denmark. In 1994, the Company, through its subsidiary PMS
Norden, began developing systems for individual life and group and life
pensions, and began researching the integration of these systems with Series
III for the European market.
To further strengthen its position in Europe and other foreign markets, the
Company acquired Creative in December 1994 and micado in October 1995.
Creative, headquartered in the United Kingdom with offices in England,
Australia, and Southeast Asia, provides services and products to medium-sized
general insurance companies. The acquisition of Creative positioned the
Company to capitalize on business opportunities throughout Europe, the Pacific
Rim, and Australia. Headquartered in Germany, micado provides services and
software to German insurance and financial services companies. The acquisition
of micado, in addition to expanding the Company's customer base, positions the
Company to make significant advances in its existing client/server solutions
through the incorporation of object-oriented technology.
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Business Strategy
The Company's business strategy is to offer value to customers by structuring
long-term relationships and agreements that provide its customers with
continuously updated solutions, while providing a high degree of recurring
revenues to the Company. During the early stages of the Company's development,
a major portion of the Company's revenues was 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 to the worldwide
insurance industry, the portion of the Company's revenues derived from systems
licensing activities has declined, representing 19.0% of total revenues in
1995. The remainder of the Company's revenues are derived primarily from
outsourcing, professional services and information services activities.
As a result of this strategy, initial license charges, that portion of license
charges from systems licensing activities which is generally recognized as
revenue upon execution of a license obligation and delivery of the product,
have declined, representing 9.1% of total revenues in 1995, compared to 16.4%
in 1985.
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 worldwide insurance industry.
The majority of the Company's revenues are generated from products and
services provided in the United States, although the Company does have
customers in a total of 30 foreign countries. 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,
1995 1994 1993
United States 76.4% 84.8% 87.1%
Canada 4.3% 4.1% 4.3%
Europe 13.3% 6.7% 5.5%
Asia/Pacific 6.0% 4.4% 3.1%
Software Products
The Company offers over 100 business solutions, which include more than 70
application software systems, designed to meet the needs of the property and
casualty and life insurance markets.
The Company's primary software systems currently run on midrange and large
scale IBM computers or IBM compatible equipment utilizing most IBM operating
systems. In addition, a number of systems run on intelligent workstations.
The Company also supports an open systems strategy, which provides for the
host-based software components to be converted to certain Unix platforms,
allowing customers the capability of adding cost-effective increments of
processing power. Significant efforts are underway to add support for
Microsoft's major operating systems (Windows NT and Windows 95) and to
incorporate object-oriented technology (see Product Development).
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 to
permit ease of use, providing flexibility in adapting them to a particular
customer's requirements and modifying them as business conditions change. The
systems are designed to be modular in structure and to facilitate the
application of updates and enhancements, as well as the interfacing and
integration with different systems. Most of the systems will operate on
either a stand-alone basis or in conjunction with each other.
Client/server technologies serve as a platform for the Company's systems for
the property and casualty and life insurance markets. A primary objective of
the Company's software products is the full integration of the information and
data gathering, processing, underwriting, claims handling and reporting
processes for providers of insurance, creating a cooperative processing
environment. In this cooperative processing environment, insurance
professionals, using advanced intelligent workstations, can process multiple
tasks concurrently with minimal clerical support and data entry. The
Company's software products use advanced and emerging technologies such as
relational databases, graphical user interfaces and imaging. The Company's
objective is to provide software systems, which provide for system upgrades,
additions and interfaces to be implemented more quickly and at reduced costs,
with minimum disruption to ongoing operations.
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The Company obtains from third parties licenses for a wide range of software
products and services which are used in varying degrees to develop and enhance
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 that, if discontinued, would significantly
impact the Company's development of its products and performance of its
services.
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Billing and Collection Management System, Billing and Collection Workstation,
BCWS, Client Information System, Client Information Workstation, CIWS,
Management Decision Support, MDS, Work in Progress, WIP, Print Enabling
Interface, PEI, Media Enabling Platform, MEP, Integrated Application Platform,
ViLink Exchange, ViLink Integrator, Policy Management System, PMS,
Underwriting Workstation, UWS, Micro Mainframe System, MMS, Claims Handling
System, Claims Workstation, CWS, Insurance Management Information System,
Management Information System, MIS, Reinsurance Management System, RMS, Point,
Point/Latin American, All Lines Rating, ALR, Document Automation-AFG (Advanced
Forms Generation), Insure/90, Advanced Communication Access, Financial
Workstation, FWS, Financial Management System, FMS, Document Automation
Platform, DAP, CyberLife, CyberLife/ES, CyberLife/BE, CyberLife/DS,
CyberLife/NB, CyberLife/AD, Decisionwise, Aurora, Pension and Life Insurance
System, PLIS, Group Insurance Workstation, GIWS, Capsil/Asia, Point Life,
System for the Administration of Reinsurance, Star, Maintenance, Enhancements
and Services Availability, and MESA are trademarks or service marks of the
Company or one of its subsidiaries.
All other products or company names used herein are used for identification
purposes only, and may be trademarks or registered trademarks of their
respective companies.
Insurance Industry Software Products
Billing and Collection
BILLING AND COLLECTION WORKSTATION ("BCWS") - Client/server solution that
automates the management of billing and collections for property and casualty,
individual life, and group life lines of business. Multiple billing
disciplines (including single policy, account bill, third party, agency) and
collection methods (including cash entry, lockbox, OCR, EFT, and credit card)
are designed to offer enhanced flexibility to the user.
Client
CLIENT INFORMATION SYSTEM ("CIS/3270") - DB/2-based mainframe system with a
CICS front-end 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 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.
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.
General Office
WORK IN PROCESS ("WIP") - Client/server solution that facilitates the
management, including tracking, assigning, reassigning and controlling, of
various tasks generated in an insurance company environment.
Print Enabling Interface ("PEI") - Client/server solution that provides
integration between the Series III family of products and an insurance
company's chosen print package.
Media Enabling Platform ("MEP") - A multimedia platform that helps companies
harness technology advancements and speed information through an organization
by providing input mechanisms for still and video cameras, voice technology,
scanners, and fax machines. Multimedia platform can be embedded into any
Series III solution.
Architecture
INTEGRATED APPLICATION PLATFORM ("IAP") - A technical platform which, using
client/server technology, provides the capability to develop applications and
link software systems, whether they are those of the Company or another party.
Includes data models, process models and other Series III architecture
foundations.
Expert Systems
Judgment Processor - Judgment Processor is a patented system designed to
emulate the decision-making logic of an effective human expert in a variety of
business application areas, including life insurance, property and casualty
insurance, and mortgage loan underwriting. Judgment Processor runs on a LAN
and can include cooperative-processing components running on a variety of
conventional host computers.
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Insurance On The Internet
ViLink Exchange - The ViLink Exchange will be used by sales channels (agents,
brokers, agencies, and other less-traditional channels) to manage the delivery
and presentation of information to and from both insurance product and service
providers. It uses popular Internet browsers and communication software to
deliver and manage information for the distribution organization.
ViLink Integrator - The ViLink Integrator will be located in those firms
providing insurance products as well as in service providers to the industry.
Its purpose is to deliver information content, act as a gateway to back office
systems, and provide the platform to support interactive services. The
Netscape Commerce Server is used in the Integrator to secure delivery of
information via the Internet.
Property & Casualty Software Products
Underwriting And Policy Administration
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 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.
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. "Rating Processor" and
"Underwriting Decision Support" ("UDS") are subcomponents of Underwriting
Workstation that may be licensed separately.
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.
Claims
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 solution that automates the claims
handling processes, as well as provides access to the various claims functions
and information in a distributed environment.
Management Information And Reinsurance
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.
BILLING AND COLLECTION MANAGEMENT SYSTEM ("BCMS") - An on-line system
that automates management of 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.
MANAGEMENT INFORMATION SYSTEMS ("MIS") - 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.
REINSURANCE MANAGEMENT SYSTEM ("RMS") - Client/server solution that provides
data capture of reinsurance rules that are used to generate and manage
cessions and retrocessions to provide an accurate analysis of reinsurance
placement for premiums and losses.
Midrange Platforms
POINT - An integrated midrange property and casualty processing system
designed to run on IBM's AS/400 computer. Provides policy, claims, financial
and reinsurance management, coupled with a relational database for general
insurance companies based in the Americas.
Point/Latin AMERICAN - Available in Spanish, a fully integrated relational
property and casualty solution for Latin American insurance industry. Designed
for the AS/400 environment, provides support for new business, policy
administration, claims, financials, reinsurance, and management reporting.
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ALL LINES RATING ("ALR") - A midrange solution that automates rate, quote,
premium generation and policy issuance for personal and commercial lines for
POINT. Supports new business, endorsements and renewals.
Document Automation-AFG (Advanced Forms Generation) - A midrange document
publishing solution that interfaces with POINT's policy-issue component.
Automates the production, collation, and assembly of policies and produces
high-quality, laser-printed output.
Insure/90 - Insure/90 is an on-line, real-time integrated solution for general
insurance companies. Designed for the AS/400, Insure/90 supports client
administration, new business, underwriting, claims management, reinsurance,
coinsurance and other insurance functions.
Sales And Marketing
ADVANCED COMMUNICATIONS ACCESS ("ACA") - A 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 CSIO standards for several lines
of business.
Financial
FINANCIAL WORKSTATION ("FWS") - Client/server solution that provides financial
balancing and summarization for general ledger interaction.
FINANCIAL MANAGEMENT SYSTEM ("FMS") - VSAM-based on-line, real time integrated
general ledger solution that allows for the allocation of expenses, budgeting,
reporting, transaction balancing, and file updating.
Document Automation
Document Automation Platform ("DAP") - DAP is a system that automates policy
production and document assembly for personal and commercial lines of
business. DAP merges variable data extracted from the Company's systems with
predefined forms to produce high-quality, laser-printed documents. DAP
automatically collates forms as requested for insureds, agents, home offices,
lienholders, and other recipients. DAP also features an intelligent,
workstation-based data entry and editing facility to serve as a front-end data
collection system. It uses on-screen displays of insurance forms as templates
for entering and editing data. Producers can use object-code-only versions of
DAP to collect and transmit data from remote offices to the home office.
Life Software Products
CyberLife/ES (Enterprise System) - A relational, client/server solution that
provides integrated support for traditional and advanced products and
distribution channels. This is comprised of four modular elements:
CyberLife/BE (Business Enablers), CyberLife/DS (Distribution Support),
CyberLife/NB (New Business), and CyberLife/AD (Administration). Together,
these elements deliver the necessary business functions to fully automate all
processes associated with the acquisition and ongoing support of insurance
policies and other financial contracts.
CyberLife/BE (Business Enablers) - Collection of architectural components,
enterprise business enablers, and underlying functionality (such as
correspondence and communication capabilities) that provide a stable
client/server foundation for the CyberLife Enterprise System. CyberLife's
design allows for cross-platform implementations with inherent support for
legacy and third-party system integration.
CyberLife/DS (Distribution Support) - Client/server solution that supports the
entire sales cycle from prospecting and needs analysis through policy issue
and customer service. This comprises three functional elements: Proposals,
Application Processing, and Inquiry. Together, these elements enable companies
to employ creative as well as traditional methods of product distribution.
CyberLife/NB (New Business) - Offers new perspectives to traditional methods
of acquiring and processing new business and underwriting requirements to
provide fast access to accurate information, decreased turnaround and issue
times, reduced overhead costs, and improved risk selections. Supports both
traditional and advanced products including annuities, interest-sensitive,
equity-based, and market-value-adjusted products. This comprises four
functional elements: Application Processing, Provider Interface, Expert
Underwriting, and Issue with additional support for maintaining client
information; communicating to distribution channels; integrating with legacy
or commercial software packages; and automating forms, documents, and
correspondence.
CyberLife/AD (Administration) - Comprehensive solution that supports full
Policy Processing, Billing and Collections, Commissions, and Financial
Reporting. Through its additional functions and underlying business enablers,
CyberLife also supports contract payouts, communications with distribution
channels, and maintenance and access to client information. Built upon a
relational, client/server architecture, CyberLife/AD supports large companies
with millions of policies as well as midrange companies looking to expand and
enhance their product lines. Its real-time processing and communication
structure facilitates quick product introduction, low policy-processing costs,
and superior customer service.
Decision wise - A set of tools that acquires external data, creates a dynamic
process flow, assimilates product, program, and regional requirements, and
expedites the development of decision models.
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Capsil - This on-line, real-time system provides complete new business and
administrative support for traditional whole life and term products, flexible
and single-premium annuities, universal life, variable universal life,
interest-sensitive whole life, and structured settlements. Platforms supported
include LAN, RS/6000, and mainframe. CAPSIL is a PMSC registered trademark in
the United States of America and Asia only. Outside of the United States and
Asia, the CAPSIL mark may belong to other legal entities and should not be
considered a PMSC mark, nor a representation of a PMSC product.
Aurora - AURORA is an enterprise-wide, client/server set of insurance
applications designed for the European life industry. AURORA is a full-service
group of automated insurance systems that use a relational database
architecture to manage both individual and group lines including traditional
life, annuities, pensions, universal life, and unit-linked investment
products.
PENSION AND 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.
GROUP INSURANCE WORKSTATION ("GIWS") - European application for administration
of life and pension insurance, which provides all functionality from quoting,
administration of contract and employee information, disbursements and
termination of the contract. This application is modular and integrates with
other Series III systems, as well as non-Series III systems.
CAPSIL/Asia - CAPSIL/Asia is a fully integrated, on-line, real-time AS/400
solution designed to support the Asia/Pacific life insurance industry.
Available in Chinese, Korean, and English, CAPSIL/Asia supports complete new
business and administrative functions for traditional whole life, universal
life, variable life, and interest-sensitive insurance instruments. CAPSIL is a
PMSC registered trademark in the United States of America and Asia only.
Outside of the United States and Asia, the CAPSIL mark may belong to other
legal entities and should not be considered a PMSC mark, nor a representation
of a PMSC product.
Point Life - Point Life is a real-time AS/400-based application for Latin
America. Point Life supports the full range of traditional and
interest-sensitive products including universal life, par and non-par plans,
annuities, TSAs, and A&H.
System for the Administration of Reinsurance ("STAR") - Developed by PMSE
London Insurance Services, STAR is a London Market reinsurance application
system. STAR supports ceded and assumed property and casualty reinsurance for
direct, facultative, excess of loss, and proportional reinsurance. STAR
operates on a three-tier, client/server platform using a Windows-based client,
a Windows NT/SNA-based server and an MVS/DB2 host.
Product Support and Services
Most customers licensing the Company's software systems pay a monthly license
fee which entitles the customer to MESA (Maintenance, Enhancements and
Services Availability). Under the maintenance provisions of MESA the Company
provides telephone support and error correction to current base versions of
licensed systems. The enhancement provisions of MESA provide any additions or
modifications to the licensed systems, if and when they become generally
available as a result of the Company's continuing research and development
efforts. Services availability allows customers access to professional
services, other than maintenance and enhancements, which are provided under
separate arrangements during the MESA term.
Most customers licensing the Company's software systems also use the Company's
professional services. The Company offers professional services, which include
systems implementation, systems migration and integration assistance,
consulting and educational services. These services are available under
services agreements and are charged for separately. These services are
generally provided under time and material contracts and in some circumstances
under fixed price arrangements.
Additionally, the Company offers outsourcing and information 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 American telecommunications network using
the Company's database products. Outsourcing services are typically provided
under contracts having terms from three to ten years.
Professional Services
BUSINESS NEEDS ANALYSIS - Maps a customer's strategic plan in conjunction
with the rollout of the Company's future software product releases and defines
the sequence, time frame, and effort of tactical projects necessary to meet
that strategy.
CONSULTING SERVICES - Experienced personnel are available for consultation in
the areas of insurance and data processing. Consulting services can range
from project management to programming.
EDUCATION SERVICES - Offers a comprehensive selection of hands-on classes to
familiarize customers with the use of systems. Classes can be taught at the
customer's site or at the Company's home office. Education Services also
provides a Resource, Evaluation, and Planning Service to help customers
identify their training needs, as well as Series III University enrollment and
curriculum.
<PAGE>9
IMPLEMENTATION SUPPORT - The Company's project teams provide the customer
their expertise in planning, customization, modification, installation and
testing. Packages are available for all of the Company's systems.
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 highly regulated lines of business such
as Massachusetts automobile 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 of underwriting risks and may be ordered and
received on an automated basis through the Company's nationwide
telecommunications network. 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), credit reports and histories, property claims
estimating, physician reports and medical histories, as well as undisclosed
driver information, driver mileage verification and claims histories provided
through the Company's database services.
Product Development
Historically, the computer software and services industry has experienced
rapid technological changes in hardware and software. Additionally, the
insurance industry is constantly subject to regulatory changes and new
requirements. This combination of change requires the Company to develop new
products and enhance its existing products to constantly meet the automation
needs of the worldwide insurance industry.
An example of the Company's continuing product development effort is the
Company's new generation of systems, Series III for property and casualty and
CyberLife for the life and financial services industries (see Software
Products above).
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. With the
completion of Release 7 in 1995, Series III, with the exception of worker's
compensation insurance, offers a comprehensive solution to the property and
casualty industry worldwide.
CyberLife represents a significant investment to rearchitect the existing
suite of CYBERTEK enterprise solutions into a true client/server environment.
With the first release of the system in 1995, CyberLife offers an integrated
solution to the life insurance and financial services industries.
While the Company intends to continue to develop applications for IBM
architecture platforms, it also supports open systems. This open systems
approach, which allows the host-based components to be converted to various
platforms, will allow separate software products to be integrated with one
another, as well as with the customer's existing and future systems, whether
provided by the Company or other vendors.
The Company's first agreement to support open systems development was with
NCR. The Company and NCR are jointly marketing the Company's Series III
systems worldwide to insurance companies implementing NCR's UNIX-based
solutions. NCR provided a full range of scalable platforms to the Company and
in 1994 the Company successfully ported the Series III host-based components
to run on NCR's System 3000 Unix Platform, a symmetric multiprocessor system.
In addition, NCR made a commitment to support the marketing of the Series III
software and participated in funding the conversion of the Series III host-
based software to NCR's UNIX-based platforms.
The Company is also in the process of re-engineering its POINT system, a
midrange solution designed for use by mid-sized property and casualty
insurance companies, to make it portable across different hardware platforms.
The POINT system, with this open systems direction, will offer insurance
companies increased flexibility in adding functionality and processing power.
In an effort to maintain and strengthen its competitive position, the Company
expends substantial amounts on internal product development. Expenditures for
internal product development, which were capitalized, were $46.8, $30.7 and
$24.7 million in 1995, 1994, and 1993, respectively, representing 8.7%, 6.2%
and 5.5%, respectively, of total revenues. In addition to its continuing
development efforts, the Company, in the past several years, has 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
$4.2, $2.0 and $25.1 million in 1995, 1994, and 1993, respectively,
representing .8%, .4% and 5.5% respectively, of total revenues.
The Company intends to continue to expand its product and services offerings
through internal development and acquisitions.
<PAGE>10
Marketing and Customers
The Company markets its products and services to several thousand property and
casualty and life insurance companies, and independent agents and adjusters.
In addition, the Company offers its software products and automation and
administration support services in 33 foreign countries. At December 31,
1995, the Company was providing its products and services to more than 5,500
insurance companies, agents and adjusters. No one customer accounted for more
than 10% of revenues during the year ended December 31, 1995.
The Company markets its products and services through a staff of approximately
162 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, the marketing process may
extend over several months for a prospective customer seeking a major
automation or information solution.
In addition to its own software products, the Company markets certain third
party software products to its customers. Typically, these products are
designed to perform noninsurance functions or to improve the control and
productivity of computer resources.
Licenses and Product Protection
The Company's revenues are generated primarily by licensing to customers
standardized insurance software systems and providing outsourcing,
professional services and information services to the worldwide 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, which covers the right to use during the term of
the agreement, also provides access to Maintenance, Enhancements and Services
Availability ("MESA") (see description under Product Support and Services).
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 trade
secrets and proprietary information. Notwithstanding those restrictions, it
may be possible for competitors of the Company to obtain unauthorized access
to the Company's trade secrets and proprietary information. The Company also
has registered service marks or pending applications for registration for many
of its software products.
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 related outsourcing,
professional and information services to the worldwide property and casualty
and life insurance industries. Very large insurers, which internally develop
systems similar to those of the Company, may or may not 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 several companies that provide information services similar to those
provided by the Company to the insurance industry. These companies 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 performance and technological advances.
Employees
At December 31, 1995, the Company had 4,655 full-time employees and 5,072
total employees located in offices worldwide.
<PAGE>11
Item 2. Properties
The Company owns its 700,000 square foot headquarters complex located on 145
acres in Blythewood, South Carolina. The Company leases space at 35 various
locations domestically for its regional and branch offices throughout the
United States. Internationally, the Company has 13 locations throughout
Canada, Europe and the Pacific Rim.
The Company, through its data centers located in North America, Europe and
Australia, utilizes 12 mid-range and mainframe computers. All computers are
owned or held under short-term leases. In total, these computers have 9,640
megabytes of memory and are capable of processing approximately 864.6 million
instructions per second. The Company currently utilizes up to 90% of
this capacity.
Item 3. Legal Proceedings
In December 1994, the Company reached an agreement, which was subsequently
approved on May 26, 1995, by the United States District Court for the District
of South Carolina, to settle its shareholder class action. The settlement of
$31 million was paid by the Company's Directors' and Officers' Liability
Insurance Carrier, the Company's former accountants and the Company. The
Company's portion of the settlement and associated litigation costs resulted
in a special one-time charge of $34.2 million ($21.3 million after tax) in the
fourth quarter of 1994. This represents the Company's portion of the total
settlement, plus the Company's litigation costs of $18.1 million ($11.2
million after tax), less the recovery from the insurance company. In March
1995, the Company and its insurance carrier signed an agreement to settle
amounts contested and the carrier agreed to pay an additional amount of $1.7
million in full settlement of the Company's claims. Accordingly, the Company
recorded a credit of $1.7 million, in the first quarter of 1995, as a further
adjustment to the estimated costs of settling the securities class action.
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 this investigation.
The Company also had been advised that the United States Attorney for the
District of South Carolina was conducting an investigation into issues raised
by the shareholder class action and SEC investigation described above. In
January of 1996, the Company received a letter from the United States Attorney
advising that the investigation had been terminated and advising that the
United States Justice Department had closed its files on the matter.
In March 1994, Security Life of Denver Insurance Company ("SLD") brought suit
against the Company in the United States District Court for the District of
Colorado alleging breach of a life insurance joint development contract,
unfair trading practices and fraud. Despite the fact that the plaintiff
expressly agreed by contract to exclude from any dispute all indirect and/or
consequential damages, they now assert claims for direct, indirect,
consequential and punitive damages alleged to be in excess of $80 million.
The Company has asserted various affirmative defenses and is vigorously
pursuing a prompt resolution through all available legal processes. The
Company is also vigorously pursuing counterclaims against SLD for fraud,
breach of contract and failure to pay, unauthorized use of the Company's
software systems, misappropriation of trade secrets, unfair trade practices,
conversion of the Company's systems, unjust enrichment and fraudulent
concealment. The Company is seeking in excess of $80 million against SLD.
The Company is also seeking an injunction prohibiting SLD from continuing
unauthorized use of certain of the Company's systems and unauthorized use of
the Company's trade secrets.
In November 1993, the California State Automobile Association Inter-Insurance
Bureau and the California State Automobile Association ("CSAA") brought suit
against the Company in the United States District Court for the Northern
District of California alleging breach of contract and implied covenants of
good faith and fair dealing, as well as fraud and negligent misrepresentation
concerning certain early versions of systems licensed by the Company. Despite
the fact that the plaintiffs contractually agreed to exclude from any dispute
all indirect and/or consequential damages, they now assert claims for direct,
indirect, consequential and punitive damages alleged to be in excess of $200
million. The Company has asserted various affirmative defenses and is
vigorously pursuing a prompt resolution through all available legal processes.
The Company is also vigorously pursuing counterclaims against the plaintiffs.
The Company's claims against the plaintiffs are for breach of contract,
failure to pay, and recoupment. In January of 1996, the Court considered
motions for summary judgment presented by both CSAA and the Company seeking to
dismiss the parties' respective claims. These motions were denied; however,
the Court entered an order which limited any recovery by the Company at trial
on its counterclaims to breach of contract damages and recoupment of the
discounts granted to CSAA, which damages and recoupment are approximately $6
million. The jury trial of this matter commenced on March 4, 1996, and is
expected to conclude in late April or early May 1996.
Also in January of 1996, the Company and Liberty Life Insurance Company each
filed a complaint against the other arising from a previously disclosed
contract dispute from the parties' prior contractual relationship related to
the development and licensing of Series III life insurance systems and the
subsequent licensing of the Company's Cybertek life insurance systems. The
Company's com-
<PAGE>12
plaint against the defendants (Liberty Life Insurance Company, the Liberty
Corporation, and Liberty Insurance Services) was filed in Richland County,
South Carolina, alleging breach of contract, recoupment, breach of good faith
and fair dealing, breach of contract accompanied by a fraudulent act. The
Company is seeking equitable relief, including preliminary and permanent
injunctions, and currently an unspecified amount for actual, compensatory, and
consequential damages. The Liberty Life Insurance Company's complaint against
the Company was filed in Greenville County, South Carolina, alleging breach of
contract, breach of express and implied warranties, fraudulent inducement,
breach of contract accompanied by a fraudulent act, and recision. Liberty
Life Insurance Company has alleged actual and consequential damages of
approximately $30 million and also seeks treble and punitive damages. The
Company has asserted various affirmative defenses and is vigorously pursuing a
prompt resolution through all available legal processes.
The Company was informed by its insurer, St. Paul Mercury Insurance Company
("St. Paul"), that based upon the allegations raised in the SLD and CSAA
lawsuits, St. Paul does not believe it would be obligated under the Company's
insurance policies to reimburse defense costs or indemnify the Company for any
payments relating to these claims. The Company disagrees with this conclusion
and on June 20, 1995 the Company's insurer commenced a declaratory judgment
action to determine the insurer's obligations related to defense costs and
indemnity related to these two lawsuits. As a result of this action, the
Company has filed a counterclaim against St. Paul alleging St. Paul's breach
of two (2) insurance policies issued to the Company by St. Paul and breach of
good faith and fair dealing by St. Paul. The Company seeks to recover the
Company's defense costs in the CSAA and SLD matters, coverage for damages, if
any, awarded in those matters, and consequential and punitive damages.
As a result of the action of St. Paul described above, the Company determined
it was probable the Company would incur litigation expenses arising in the
CSAA and SLD matters through their anticipated conclusion during 1995 of $7.9
million and provided for these expenses at June 30, 1995. The costs provided
for include, but are not limited to, legal fees paid or anticipated to be paid
and other costs related to the Company's claims and defenses for these
matters. The Company re-evaluated its estimate of anticipated liability for
expenses to be incurred in the proceedings described above due to the
continuance of the CSAA and SLD trial dates into 1996, the SEC investigation
continuing into 1996, and the litigation with St. Paul and Liberty. As a
result of this re-evaluation, the Company determined it was necessary to
increase its estimate of anticipated liability for the costs associated with
these matters and at December 31, 1995, provided an additional $12.3 million
for the estimated future litigation expenses arising from these matters during
1996. Changes in the status of these proceedings could result in a change in
amounts estimated.
In addition to the litigation described above, 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 any of the above matters could have a material adverse
effect on 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. The Company, however, is unable to predict the ultimate
outcome or the potential financial impact of these matters.
<PAGE>13
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders, held on May 10, 1995, the
Company's stockholders approved: (i) the election of three directors, Dr. John
M. Palms (15,543,180 votes for and 30,184 abstentions), Joseph D. Sargent
(15,543,332 votes for and 30,032 abstentions) and G. Larry Wilson (15,542,091
votes for and 31,273 abstentions) to serve a term of three years and one
Director, Joe M. Henson (15,543,530 votes for and 29,834 abstentions) to serve
a term of one year; (ii) ratification of the selection of independent auditors
(15,428,496 votes for, 18,220 votes against and 126,648 abstentions); (iii)
amendments to the Policy Management Systems Corporation 1989 Stock Option Plan
and the performance goal components (7,267,682 votes for, 5,256,343 votes
against, 1,037,404 abstentions, and 2,011,935 broker non-votes); and (iv) the
Policy Management Systems Corporation Employee Stock Purchase Plan (14,205,141
votes for, 77,681 votes against and 1,290,542 abstentions).
<PAGE>14
Executive Officers of the Registrant
Name Age Position
G. Larry Wilson 49 Chairman of the Board, President and Chief
Executive Officer
David T. Bailey 49 Executive Vice President
Paul R. Butare 44 Executive Vice President
Donald A. Coggiola 56 Executive Vice President
Robert L. Gresham 53 Executive Vice President and Treasurer
Stephen G. Morrison 46 Executive Vice President, Secretary and
General Counsel
Timothy V. Williams 46 Executive Vice President and Chief
Financial Officer
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 1998. 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.
Paul R. Butare - Executive Vice President of the Company since October, 1995.
Responsible for the Life Insurance Group. In previous capacities with the
Company, Mr. Butare has had management responsibilities for Life sales and
marketing, Life product development, Property and Casualty marketing support
and Property and Casualty systems and product development. Employed by the
Company since 1981.
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 continues to
perform certain services in that capacity on a declining basis.
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 to joining the
Company, 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.
<PAGE>15
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.
1995
High Low
First Quarter $45 3/8 $37 3/4
Second Quarter 51 5/8 43 1/2
Third Quarter 54 1/4 46
Fourth Quarter 51 1/8 42 5/8
1994
High Low
First Quarter $39 3/4 $28 3/4
Second Quarter 35 1/8 25 3/4
Third Quarter 41 1/2 32 1/4
Fourth Quarter 47 3/4 37 1/4
Title of Class
Common Stock, $.01 par value
Number of Record Holders as of March 19, 1996
1,488
<PAGE> 16
Item 6. Selected Consolidated Financial Data
<TABLE>
<CAPTION>
(Unaudited)
(Restated) (Restated)
Results of Operations 1995 1994 1993 1992 1991
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Revenues $537,302 $492,706 $453,099 $489,261 $411,156
Operating income (loss) 8,624 (19,745) (77,053) 78,971 63,659
Other income and expenses, net (543) 1,256 10,656 11,792 9,117
Income (loss) before income
taxes (benefit) 8,081 (18,489) (66,397) 90,763 72,776
Net income (loss) $ 3,139 $ (9,658) $(56,134) $ 61,522 $ 42,596
Net income (loss) per share $ .16 $ (.46) $ (2.46) $ 2.65 $ 2.21
Fully diluted net income
per share _ _ _ _ $ 2.14
Financial Condition
Cash and equivalents, marketable
securities and investments $ 44,614 $ 34,304 $156,772 $238,521 $197,414
Current assets 203,515 167,725 287,737 343,913 299,750
Current liabilities 105,522 76,856 80,981 57,226 67,505
Working capital 97,993 90,869 206,756 286,687 232,245
Total assets 577,074 524,031 659,803 706,942 632,692
Long-term debt (excludes
current portion) 14,873 4,162 5,655 6,001 5,976
Total liabilities 194,402 147,109 182,831 127,866 132,813
Stockholders' equity 382,672 376,922 476,972 579,076 499,879
<FN>
The above should be read in conjunction with the Consolidated Financial
Statements, Notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations appearing in this Annual Report.
The results of operations in 1995, 1994 and 1993 reflect special charges. The
results of operations in 1995 reflect special charges of $56.4 million (after
taxes $39.9 million, or $2.06 per share). These charges are principally
related to the restructure of the Company's data processing facilities and
information services business, litigation costs, acquisition-related charges,
impairment of certain intangible assets and software associated with acquired
businesses and the gain on the sale of the Company's health insurance systems
business. The results of operations in 1994 reflect special charges of $71.9
million (after taxes $44.2 million or $2.27 per share). These charges are
principally related to the impairment of intangible assets associated with
acquired businesses and discontinued acquired software products and changes in
estimates associated with previously established restructuring reserves. The
results of operations in 1993 reflect special charges of $98.8 million (after
taxes $76.2 million or $3.29 per share). These charges are principally related
to the impairment of certain intangible assets associated with employee
severance and outplacement and the future abandonment of certain leased office
facilities as well as certain other one-time charges.
As a result of special audits performed by the Company's independent
accountants for the six months ended June 30, 1993, and the twelve months
ended December 31, 1992, the Company determined that retained earnings
previously reported as of December 31, 1992 required adjustment 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 cumulative adjustment to retained earnings as of December 31, 1992, net of
related tax effects was an increase of $5.1 million, which principally
included adjustments for the deferral of revenues due to changes in timing of
revenue recognition, the reduction of expenses due to the capitalization of
certain software costs and reserves established for losses on certain services
contracts. The cumulative adjustment to previously reported net income for
1992, net of related tax effects, was an increase of $2.2 million, or $.10 per
share. Also as a result of these audits, the Company determined that retained
earnings previously reported as of December 31, 1991 required adjustment. The
cumulative adjustment to retained earnings as of December 31, 1991, net of
related tax effects was an increase of $2.3 million, which principally
included adjustments for the deferral of revenues due to changes in timing of
revenue recognition and the reduction of expenses due to the capitalization of
certain software costs. The adjustment to December 31, 1991 retained earnings
had no effect on net income per share as previously reported.
Effective January 1, 1993, the Company revised its estimates of the period of
future benefit of goodwill from twenty-five years for all goodwill to fifteen
years for goodwill related to information and computer services company
acquisitions and ten years for goodwill related to software company
acquisitions. The effect of this change in accounting estimate was to increase
amortization expense by $2.1, $2.0 and $2.6 million for 1995, 1994 and 1993,
respectively. Additionally, effective January 1, 1993, the Company revised its
estimate of the useful life of internally developed software from four years
to five years. The effect of this change in accounting estimate was to lower
amortization expense by $3.6, $2.4 and $1.8 million for 1995, 1994 and 1993,
respectively.
See Quarterly Consolidated Results of Operations on page 54 and Note 12 of
Notes to Consolidated Financial Statements on page 50.
</TABLE>
<PAGE>17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Set forth below are certain operating items expressed as a percentage of
revenues and the percent increase (decrease) for those items between the
periods presented:
<TABLE>
<CAPTION>
Percent
Increase (Decrease)
Percentage of Revenues 1995 1994
Year Ended December 31, vs vs
1995 1994 1993 1994 1993
<S> <C> <C> <C> <C> <C>
Revenues:
Licensing 19.0% 18.1% 16.5% 14.6% 19.3%
Services 81.0 81.9 83.5 7.8 6.7
100.0 100.0 100.0 9.1 8.7
Costs and Expenses:
Employee compensation
and benefits 36.6 35.5 37.0 12.6 4.3
Computer and communications
expenses 5.8 5.2 4.9 21.5 13.3
Information services and
data acquisition costs 21.1 26.9 28.8 (14.3) 1.7
Impairment and restructuring
charges, net 2.0 6.3 17.8 (65.5) (61.9)
Depreciation and amortization of
property, equipment and
intangibles 11.3 11.6 13.1 5.9 (3.3)
Business acquisition
charges .5 - - - -
Purchased research and
development 2.7 .5 - 468.4 -
Litigation settlement and
expenses, net 3.4 6.9 - (46.0) -
Gain on sale of Health business
and related assets (1.5) - - - -
Loss on disposition of data
processing equipment 3.4 - - - -
Other operating costs and
expenses 13.1 11.1 15.4 27.9 (21.3)
98.4 104.0 117.0 3.2 (3.3)
Operating income (loss) 1.6 (4.0) (17.0) 143.7 74.4
Other income and expenses,
net (.1) .2 2.3 (143.2) (88.2)
Income (loss) before income
taxes (benefit) 1.5 (3.8) (14.7) 143.7 72.2
Income taxes (benefit) .9 (1.8) (2.3) 156.0 (14.0)
Net income (loss) .6% (2.0)% (12.4)% 132.5% 82.8%
</TABLE>
<PAGE>18
The Company's revenues are generated principally by licensing to customers
standardized insurance software systems and providing automation and
administrative support and information services to the worldwide insurance
industry. Licensing revenues are provided for under the terms of 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. Services revenues are derived from professional
support services, which include implementation and integration assistance,
consulting and education services, 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, administration support and automated information
services through the Company's nationwide telecommunications network using the
Company's database products.
Revenues
Licensing 1995 Change 1994 Change 1993
(Dollars In Millions)
Initial charges $ 48.8 28.1% $38.1 43.8% $26.5
Monthly charges 53.3 4.5 51.0 5.8 48.2
$102.1 14.6% $89.1 19.3% $74.7
Percentage of revenues 19.0% 18.1% 16.5%
Initial license revenues for 1995 increased $10.7 million (28.1%) due
principally to an increase in property and casualty insurance licensing
activity of $16.2 million. This increase is primarily the result of a $13.6
million increase in international licensing activity, related principally to
licensing activity of Creative, which was acquired by the Company on December
31, 1994 (see table below). Domestic property and casualty insurance licensing
revenues, which increased $2.6 million for 1995, include $4.0 million in
non-recurring revenue related to a source code license agreement with a
cross-industry vendor. The source code license agreement relates to a
productivity and utility system developed by the Company to enhance computer
resource management and control. This system allows for the expansion of
computer capability without the associated overhead costs. Under the license
agreement there is no ongoing obligation by the Company to maintain this
system and accordingly, no monthly license revenues will be recognized. The
Company also entered into a long-term license and maintenance agreement with
this same vendor covering certain operating system management software
products for use in the Company's worldwide data center operations. This
agreement replaced three previous five-year term agreements executed in 1993,
and other related agreements (see Note 8 of Notes to Consolidated Financial
Statements). Domestic property and casualty insurance license revenues for
1995 also include $3.3 million relating to a distribution agreement, and $1.5
million relating to a marketing arrangement for a UNIX-based version of the
POINT system, both with NCR Corporation (NCR), formerly AT&T Global
Information Solutions. During 1994, the Company recognized licensing revenues
of $3.8 million from NCR. Initial license revenues include $1.6, $1.3, and
$7.0 million relating to right-to-use charges for 1995, 1994 and 1993,
respectively. Additionally, initial license revenues include $3.5 and $.2
million relating to termination charges for 1995 and 1994, respectively.
The increase in property and casualty initial license revenues for 1995 was
offset in part by a $6.6 million decrease in health insurance initial
licensing revenue (see Note 11 of Notes to Consolidated Financial Statements).
Initial license revenues for 1994 increased $11.6 million (43.8%) compared to
1993. The increase is principally related to $10.4 million in systems
license revenue from life insurers and to an expanded license agreement with a
large Blue Cross Blue Shield organization and other licensing activities in
the health insurance systems business amounting to $6.5 million (see table
below). Increased system licensing in the life insurance market reflected
growing customer interest in the Company's CK/4 Enterprise and CyberLife
software system solutions. The Company does not expect to see recurring
transactions such as the $5.9 million Blue Cross Blue Shield license expansion
(see Note 11 of Notes to Consolidated Financial Statements). The increase in
initial license revenues, experienced by the life and health insurance systems
businesses, was partially offset by a reduction in system licensing revenues
from property and casualty insurers. Although down $5.3 million (20.1%) for
the year, property and casualty initial licensing revenues increased $7.4
million (135.3%) for the combined third and fourth quarters of 1994, compared
to the corresponding period in 1993. This increase resulted from increased
licensing in 1994 of the Company's integrated client/server technology
available in Series III and the Company's POINT system, which is typically
marketed to small to medium-sized insurers. Larger insurers also licensed
POINT for their specialized niche markets and subsidiary companies.
<PAGE>19
Because a significant portion of initial licensing revenues are recorded at
the time new systems are licensed, there can be significant fluctuations in
revenue from period to period. Set forth below is a comparison of domestic and
international initial license revenues for 1995, 1994 and 1993 expressed as a
percentage of total revenues for each of the periods presented:
1995 1994 1993
(Dollars In Millions)
Property and Casualty:
Domestic $21.4 $18.8 $22.6
International 15.8 2.2 3.7
Total $37.2 $21.0 $26.3
Total revenues 6.9% 4.3% 5.8%
Life:
Domestic $ 8.6 $ 7.3 -
International 2.7 2.9 $( .2)
Total $11.3 $10.2 $( .2)
Total revenues 2.1% 2.0% -
Health:
Domestic $ .3* $ 6.9 $ .4
International - - -
Total $ .3 $ 6.9 $ .4
Total revenues .1% 1.4% -
Combined:
Domestic $30.3 $33.0 $23.0
International 18.5 5.1 3.5
Total $48.8 $38.1 $26.5
Total revenues 9.1% 7.7% 5.8%
*Health Division divested June 30, 1995.
Monthly license charges for 1995 increased $2.3 million (4.5%) compared to
1994. This increase is principally related to an increase of $2.0 million
attributable to the acquisition of Creative in December 1994, a $1.8 million
increase in revenues associated with licensing activities in the property and
casualty domestic market and to a $1.2 million increase in maintenance
revenues related to servicing life insurers in the Nordic market. This
increase was partially offset by a $2.8 million decline in other licensing
activity, principally in the health insurance systems business.
Monthly license revenues for 1994 increased $2.8 million (5.8%) compared to
1993. This increase is principally related to an increase attributable to
licenses acquired as part of the acquisition of CYBERTEK Corporation in August
1993, increased maintenance revenues related to servicing life insurers in the
Nordic market and to other new licensing activities in both the domestic and
international life insurance markets. This increase was partially offset by a
$1.6 million decline in other licensing activity, principally the health
insurance systems business.
Services 1995 Change 1994 Change 1993
(Dollars In Millions)
Professional and outsourcing $260.3 24.8% $208.6 13.7% $183.5
Information 172.3 (10.7) 193.0 .7 191.7
Other 2.6 .3 2.0 (37.5) 3.2
$435.2 7.8% $403.6 6.7% $378.4
Percentage of revenues 81.0% 81.9% 83.5%
<PAGE>20
Professional and outsourcing services revenues for 1995 increased $51.7
million (24.8%) compared to 1994. This increase was principally related to
services from both new and existing contracts amounting to $51.3 million for
property and casualty insurance business and $16.4 million for life insurance
business, and was partially offset by a decrease in revenues from the health
insurance market of $16.0 million (see Note 11 of Notes to Consolidated
Financial Statements). The increase in property and casualty business was the
result of increased services in both the domestic and international markets.
The increase in the domestic market was the result of an $11.1 million
increase in volume related to new and existing professional and outsourcing
services contracts and a $12.0 million increase in volume related to the
governmental and residual markets for total policy management outsourcing
services, while the increase in the international market of $28.2 million was
principally due to the acquisition of Creative at December 31, 1994, and new
services contracts in Europe, Canada and the Asia-Pacific region. The increase
in life insurance business is principally the result of volume increases
relating to both new and existing outsourcing contracts and a new agreement
for total policy administration services in the domestic market, and to an
increase in the volume of professional and outsourcing services related to new
contracts in Europe.
Professional and outsourcing services revenues for 1994 increased $25.1
million (13.7%) compared to 1993. This increase was principally related to
additional services from existing and new contracts with property and casualty
insurance companies and residual markets of $25.9 million for total policy
management outsourcing services, an increase of $10.2 million in services
arising out of the acquisition of CYBERTEK Corporation in August 1993 and
$13.8 million of additional services from the Company's European life
insurance business, principally related to new customers and the acquisition
of a data center, including its workforce, in Bergen, Norway, in December
1993. These increases were partially offset by the wind-down of the New Jersey
Market Transition Facility (MTF) project, where revenues from this property
and casualty business decreased from $19.7 million in 1993 to $3.4 million in
1994 and to a decrease of $6.7 million in the Company's health insurance
systems business. As a result of an increased role in servicing additional new
contracts with insurance companies and residual markets, the Company started
to replace revenues lost from the MTF during 1994. The increase in new
outsourcing services in Europe is principally the result of signing one of the
largest outsourcing agreements in the Company's history in December 1993.
Information services revenues decreased $20.7 million (10.7%) from 1994 to
1995, due principally to a $23.3 million decrease in revenues related to the
Company's domestic property and casualty automobile and risk information
services business. The decrease in revenues associated with the property and
casualty information services business was partially offset by a $2.6 million
(4.6%) increase in life information services revenues (principally attending
physician statements and medical history reports).
Information services revenues for 1994 increased $1.3 million (.7%) compared
to 1993. This increase is principally related to a $2.5 million increase in
life information services (principally attending physician statements and
personal medical history interviews), which was partially offset by a
reduction in revenues associated with the Company's property and casualty risk
information services business.
The Company believes that decreases associated with the Company's domestic
property and casualty automobile and risk information services business,
described above, relate principally to significant changes in the property and
casualty insurance industry. As a result of the catastrophic losses arising
from several natural disasters in 1992 and 1993, insurers experienced
significant underwriting margin erosion. In some cases, insurance companies
were forced to discontinue writing business in certain high-risk areas and in
general reduced new business activity. Consequently, the demand for
information services declined, intensifying competition among information
providers and placing downward pressure on price. During the first quarter of
1994 there was a major earthquake in California and, by the second quarter,
several insurance companies that used the Company's information services had
stopped writing business in that state. With the loss of key customers and
the prospect of a further decline in sales resulting from this changing
industry environment, the Company undertook a detailed assessment to determine
future expectations for this business (For a more detailed discussion of the
effects of this assessment, see Costs and Expenses below and Note 12 of Notes
to Consolidated Financial Statements).
Costs and Expenses
Employee compensation and benefits increased $22.1 million (12.6%) for 1995
compared with 1994, and is principally the result of increased salaries and
related costs associated with the acquisition of Creative in December 1994,
increased costs associated with the growth in staffing for additional
professional and outsourcing services to new and existing customers, and an
increase in the accrual for performance compensation expense. These increased
costs were offset in part by a decrease in the use of temporary employees and
a decrease in compensation and other benefits related to the Company's sale of
its health insurance systems division on June 30, 1995 (see Notes 11 and 12 of
Notes to Consolidated Financial Statements).
<PAGE>21
Employee compensation and benefits increased $7.1 million (4.3%) for 1994
compared with 1993, and is principally related to an increase of $16.1 million
in costs associated with the acquisition of CYBERTEK Corporation in August
1993, the acquisition of a data center, including its workforce, in Bergen,
Norway, in December 1993, and the increased use of temporary labor throughout
the year. The increase in costs associated with these acquisitions was
partially offset by a reduction in compensation and other benefits of $7.8
million resulting from a downsizing in the Company's health insurance services
staff from 388 at the end of 1993 to 220 at the end of 1994. These staff
reductions were part of the Company's restructuring of its health business
(see Note 12 of Notes to Consolidated Financial Statements).
Computer and communications expenses increased $5.5 million (21.5%) to $30.9
million for 1995 compared to $25.4 million for 1994. This increase is due
principally to expenses for certain operating system management software
products utilized in the Company's worldwide data center operations (see Note
8 of Notes to Consolidated Financial Statements), and increased
communications, data circuit and maintenance costs associated with the growth
of the Company's domestic and international outsourcing operations. As a
percentage of professional and outsourcing revenues, however, computer and
communications expenses remained relatively constant at 11.9% for 1995
compared to 12.2% for 1994.
Computer and communications expenses increased $3.0 million (13.3%) to $25.4
million for 1994 compared to $22.4 million for 1993. This increase results
primarily from increased costs associated with business acquisitions.
Information services and data acquisition costs decreased $18.9 million
(14.3%) for 1995 compared to 1994, due principally to a decrease in the
volume of state fees for motor vehicle reports associated with the domestic
property and casualty automobile and information services business (see
Revenue discussion above and Note 12 of Notes to Consolidated Financial
Statements).
Information services and data acquisition costs increased $2.2 million (1.7%)
for 1994 compared with the corresponding period in 1993, due primarily to an
increase in the volume of state fees for motor vehicle reports, which is part
of the Company's property and casualty automobile information services
business, and an increase in the volume of fees for medical reports provided
by the Company's life information services business.
During the fourth quarter of 1995, the Company recorded charges aggregating
$4.1 million to provide for the costs of restructuring its property and
casualty risk information services business ($3.7 million) and costs
associated with the consolidation of existing operations with those of an
acquired business in Germany ($.4 million). Additionally, during the fourth
quarter of 1995, the Company recorded charges aggregating $6.7 million to
write-off or write-down, as appropriate, the carrying values of certain
identifiable intangible assets and goodwill related to prior business
acquisitions ($5.2 million) and computer software ($1.5 million). During
1995, the Company had a net reduction in its restructuring reserves of $.2
million principally related to the completion of certain restructuring
activities for its life and health insurance systems businesses.
The Company, as a result of significant changes in the property and casualty
insurance industry, experienced a $5.1 million operating loss (before interest
and income taxes) in its property and casualty domestic automobile and risk
information services business in 1994 ($.8 million for automobile and $4.3
million for risk) on revenues of $128.9 million ($102.5 million for automobile
and $26.4 million for risk). Although the Company took actions during 1994 to
improve the overall performance of these businesses, such as implementing
management changes, realignment and consolidation of field offices, and
refining and enhancing current product offerings, these businesses continued
to reflect declining sales and earnings, with the loss of key customers. The
Company determined that there was a trend towards reduced sales and acceptance
of new business in the industry as a result of multiple years of major
catastrophic losses affecting this industry. The Company believes that this
industry reacted to these catastrophic losses by focusing on risk
concentration and in many cases making deliberate decisions to discontinue
writing business in certain high risk areas, and some insurers ceased doing
business or withdrew from certain states. Although the Company consolidated
its branch network offices to lower its fixed costs, this did not offset the
increasing variable costs incurred due to the geographic dispersion of the
Company's customer base. As competition increased, leading to intense price
competition among information providers, the Company's competitors, through
package pricing, were offering certain competing products to the market below
the Company's cost. The Company believed that the combination of factors
would result in a continued decline in demand for certain information
services.
As a result of detailed business assessments, revised forecasts of discounted
expected future cash flows and the application of the Company's accounting
policy to evaluate recoverability, the Company determined that the carrying
value of certain intangible assets of these businesses was not fully
recoverable. The Company recorded, at October 1, 1994, impairment charges of
$19.1 million to write-off the carrying value of certain identifiable
intangible assets ($6.4 million) and goodwill ($12.7 million) related to its
property and casualty automobile and risk information services businesses.
During November, 1995, the Company entered into an alliance with a leading
database information enterprise to provide this enterprise with motor vehicle
reports and receive access to a database containing approximately 80% of the
available automotive claims history information in the United States. This
agreement is expected to contribute to the long-term improvement of the
automobile information services business, although the combination of the
above existing factors may result in continued near-term losses. For the year
ended December 31, 1995, the automobile information services business reported
a loss of $1.1 million on revenues of $87.6 million.
<PAGE>22
During 1995, the Company continued to examine its options to improve the
overall performance of the risk information services business. Options
considered by the Company regarding this business included price increases,
outsourcing arrangements with other providers, automation of its field force
and a continued consolidation of field offices. The price increases and the
consolidation of the field offices, implemented during the first and second
quarters of 1995, did reduce the Company's operating losses by the third
quarter of 1995, but not significantly. Additionally, the Company was not
successful in its efforts to outsource the business, because major vendors in
the market provided database information to insurance companies and were not
interested in performing data collection services. The Company determined that
automating the field force was not economically justified. The risk
information services business continued to reflect declining sales and
earnings, reporting revenues of $22.7 million for the year ended December 31,
1995 and an operating loss of $4.2 million.
The Company, as a result of its continued detailed business assessment,
determined that there were no further services or investment alternatives that
could bring these operations to profitability and that the cash losses related
to the risk information services business would continue into the future. As a
result, the Company decided to restructure its property and casualty
information services business and cease providing certain data collection
services, including property inspections, commercial audits and pre-employment
checks. The Company decided to sell the pre-employment business and completely
cease operations in property inspections and commercial audits. As a result,
the Company recorded, at December 31, 1995, restructuring charges of $3.7
million for disposal and severance charges related to exiting these
operations.
As a result of less than expected financial results for 1994 relating to the
Company's on-site medical correspondence information services business,
acquired in February 1993, the Company attempted to improve the results of the
business by closing unprofitable offices and modifying the volume and type of
services offered. These modifications resulted in an increase in staffing
requirements and equipment expense; however, the anticipated increase in
revenues did not occur, and the 1995 financial results of the business fell
short of expectations. The Company performed a detailed assessment of the
business and expects a continuing decline in revenues and cash flows.
As a result, the Company determined that the expected future cash flows of
this business did not support the carrying value of the related goodwill
and identifiable intangible assets. Consequently, at October 1, 1995, the
Company recorded impairment charges of $1.8 million to write-off the
carrying value of the identifiable intangible assets ($1.1 million) and
goodwill ($.7 million).
As part of a 1983 business acquisition, the Company acquired a billing and
collection system (CABILS), which was originally utilized in specialty
processing or the processing of assigned risk business for the Company's
customers (principally those customers acquired in the business acquisition)
and, later, evolved into the basis for a portion of the Company's full
property and casualty total policy management processing for voluntary as well
as assigned risk business. During 1995, several of the Company's customers of
this business opted to either move some or all states served by them to LAD
servicing carriers or to not renew their agreements for these services for
other reasons. In addition, the Texas Plan implemented rate increases and a
mandatory takeout plan which had the effect of further decreasing the number
of policies served by the Company. During 1995, the Company decided to replace
the software acquired in 1983. Based on a detailed business assessment
performed by the Company, the anticipated discounted cash flows for this
business for the period until the software replacement is completed do not
support the carrying value of the software and related goodwill associated
with this business. As a result, the Company recorded, at October 1, 1995,
impairment charges of $2.8 million to write-off the carrying value of the
software ($.4 million) and related goodwill ($2.4 million).
During 1995, the Company ceased the active marketing of certain processing
software utilized in the processing of Individual Accident and Health business
by the Company's life business. Revenue growth for this product, if any, is
expected to come from existing clients adding policy volume through
traditional new business sales or by the acquisition of new, multi-policy
blocks of business; however, the existing customer base is expected to
ultimately decrease as processing contracts expire. A discounted cash flow
valuation performed by the Company under the above assumptions indicated that
the expected discounted future cash flows of this business do not entirely
support the carrying value of the goodwill associated with this business,
which was originally acquired in 1987. As a result, the Company recorded at
December 31, 1995 impairment charges of $.9 million to write-down the carrying
value of the related goodwill to its estimated net realizable value.
The Company has applied its methodology for measuring impairment (see Note 1
of Notes to Consolidated Financial Statements) by discounting expected future
cash flows. In determining its forecasted future results, the Company
considered historical financial performance, current and prospective insurance
industry environment and market conditions and the long-term opportunities for
future growth in the respective businesses. The Company believes that its
forecasted future results based on current market conditions and recent
historical trends, is the best estimate of the Company's discounted future
cash flows.
<PAGE>23
Expected future cash flows for these businesses are based on the current level
of operating income or loss continuing in the near-term with only a modest
recovery over the long-term principally because the Company expects the
negative impact of the insurance industry market environment to continue into
the future. Consequently, at the end of the forecast period, a residual was
included based on an estimate of liquidation value. The Company used discount
rates of 10-18%, which include factors for equity commensurate with the risk
associated with the various businesses. These rates were determined using the
Capital Asset Pricing Model which reflects the return the Company should
achieve on its investment.
The Company determined that a development and design tool used in the
development of certain of its property and casualty software no longer
provided significant service potential to the Company's development efforts.
As the Company's license for the tool is non-transferable, the Company
recorded an impairment charge at October 1, 1995 of $1.1 million to write-off
the remaining carrying value of this software.
The Company recorded certain impairment and restructuring charges amounting to
$30.7 and $80.7 million for 1994 and 1993, respectively. The amount recorded
in October 1994 includes a $21.6 million charge related to the impairment of
identifiable intangible assets and goodwill associated with acquired
businesses, principally the property and casualty automobile and risk
information services business, an $11.5 million charge related to the
impairment of acquired software products, which were discontinued, a $4.4
million credit related to a change in the Company's estimates associated with
certain restructuring reserves established in June 1993 and a $2.0 million
charge related to established liabilities for the costs of terminating certain
lease obligations in the United Kingdom and related costs of consolidating the
Company's existing operations with those of an acquired business in the United
Kingdom. Impairment charges were recorded in June 1993 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). The Company also recorded other restructuring charges of $.6
million at June 30, 1993 (see Note 12 of Notes to Consolidated Financial
Statements).
The acquisition of CYBERTEK provided the Company with the opportunity to
develop new releases of certain of its life software systems based on the
business functions of CYBERTEK software, and to assess strategic changes in
direction related to the Company's development of its future life software
systems. As a result, the Company determined in the fourth quarter of 1994
that certain business operations and software systems acquired from Genesis,
of Krumpendorf, Austria would not be compatible with the Company's future
direction. The Company decided that it would cease operations related to this
Austrian business and would no longer market or license Aussen-und Innendienst
Workstation, the software system acquired from Genesis. Consequently, the
Company recorded impairment charges to write-off the carrying value of certain
identifiable intangible assets and goodwill of $.7 million and acquired
software of $1.5 million related to this prior business acquisition.
The Company decided that in the fourth quarter of 1994 it would cease to do
business in certain markets with respect to the CAPSIL business and operations
acquired from Capsco Pallm Systems, Inc. The Company determined that the
functionality and technical platform represented by acquired software for the
domestic market would be replaced by software that has been and or is being
developed in conjunction with its future strategic direction. The acquired
software is, however, marketed and licensed in Southeast Asia. As a result of
its evaluation, the Company determined that no write-down of the software was
necessary. The Company did, however, record impairment charges of $1.8
million to reduce the carrying value of certain identifiable intangible assets
($.7 million) and goodwill ($1.1 million) relating to the acquired business in
the United States.
Due to a decision by one of the Company's property and casualty insurance
customers not to license software acquired by the Company for integration into
its property and casualty software systems and the Company's decision not to
market or license such software, the Company recorded impairment charges of
$1.9 million in the fourth quarter of 1994 to write-off the carrying value of
such software.
During the fourth quarter of 1994, the Company also decided it would no longer
market or license its Agency Workstation System (AWS), an automated insurance
agency sales and marketing software system, acquired from Agency Automation
Partners Limited. As more of the Company's customers have become operational
on Series III and plan the full implementation of Series III functions, the
Company changed its strategy for integrated system solutions between the
insurance company and its agents (or independent agents) or direct marketers.
As a result, the Company changed its dependency on AWS and integrated new
agency software system tools with its Series III functions. Consequently, the
Company recorded impairment charges of $8.1 million to write-off the carrying
value of AWS.
<PAGE>24
Impairment and restructuring charges in 1993 totaling $80.7 million resulted
primarily from impairment charges to reduce the carrying value of certain
identifiable intangible assets and goodwill related to the Company's 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). As a part of
these non-cash impairment charges, acquired software of $9.2 million was
written-off. Non-cash impairment charges included certain other identifiable
intangibles of $6.3 million and goodwill of $39.4 million. The Company also
recorded other restructuring charges of $.6 million.
During the first half of 1993, the Company experienced a significant decrease
in revenues from its health insurance systems business. The Company conducted
an assessment of the potential impact of health care legislation proposed at
the time, as well as rapidly evolving and significant changes in the
relationship of health care providers and insurers. 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. Based on this assessment, the Company concluded that certain
acquired intangible assets and software related to the health insurance
systems business were not fully recoverable and, at June 30, 1993, recorded
the impairment and restructuring charges described above. As the restructure
of the health insurance business continued through 1994 and into 1995, the
Company evaluated various alternatives and, during the second quarter of 1995,
committed to sell the health insurance systems business and cease to market
any health insurance related software systems. On June 30, 1995, the Company
completed the sale of its health insurance systems business for a total
consideration of $9.3 million in cash. After selling expense and other accrued
costs, the Company recorded a pre-tax gain of $8.1 million (see Note 11 of
Notes to Consolidated Financial Statements).
During 1994, the Company, as a result of new events occurring, changed its
estimates and reduced its restructuring reserves associated with its health
insurance systems business, established in June 1993, by $4.4 million, $2.6
million of which resulted from a change in the scheduled downsizing of the
Company's health staff and a corresponding reduction in amounts established
for severance and outplacement costs and $1.8 million of which resulted from a
lease termination at amounts less than those established for the planned
future abandonment of certain leased office facilities.
The Company established reserves of $2.0 million at December 31, 1994, in
connection with the acquisition of Creative, to provide for the costs of
terminating the Company's existing lease obligations in the United Kingdom and
relocation and severance costs associated with consolidating its existing
operations.The Company also expensed $2.6 million of purchased research and
development, related to the Creative acquisition, at December 31, 1994 (see
Note 2 of Notes to Consolidated Financial Statements).
Although depreciation and amortization expense increased only slightly from
1994 to 1995, amortization of internally developed software costs increased
$4.9 million (33.2%), due principally to amortization associated with a new
release of the Company's property and casualty insurance Series III
client/server software system and the initial release of its life insurance
CyberLife client/server software system, both of which became generally
available during the first quarter of 1995. These increases were offset by
lower amortization charges resulting principally from the impairment of
certain identifiable intangible assets, goodwill and software products
relating to the Company's property and casualty information services business
(see Note 12 of Notes to Consolidated Financial Statements) and lower
depreciation charges due to certain retirements of data processing equipment.
Depreciation and amortization expense decreased $2.0 million (3.3%) for 1994
compared with 1993. This decrease is principally related to a reduction in
amortization charges of $5.1 million associated with the impairment of certain
identifiable intangible assets, goodwill and software products principally
related to the Company's health insurance systems and property and casualty
information services businesses. This reduction was partially offset by an
increase in amortization charges of $3.5 million associated with identifiable
intangible assets, goodwill and software products related to the CYBERTEK
acquisition in August 1993.
During the fourth quarter of 1995, the Company recorded charges aggregating
$2.6 million relating principally to costs, previously deferred, of an
acquisition in Europe expected to close during the fourth quarter of 1995,
that was not consummated ($1.2 million), and the settlement of certain
contracts acquired through previous acquisitions ($1.4 million).
In connection with the October 1, 1995 acquisition of micado, the Company
expensed $14.5 million relating to purchased research and development. Such
amount was determined based on the estimated replacement cost related to the
acquired technology for which technological feasibility has not been
established and no alternative future use exists. The Company incurred
research and development costs of approximately $.4 million during the
fourth quarter of 1995. The Company anticipates technological feasibility
of the project will be reached in 1996. Additionally, the Company recorded
reserves of $.4 million related to this acquisition to provide for the
consolidation of existing operations with those of micado (see Note 2 of
Notes to Consolidated Financial Statements).
The Company, as of December 31, 1995, provided for $20.1 million in estimated
litigation costs arising from proceedings to which the Company is a party.
The costs provided for include, but are not limited to, legal fees paid or
anticipated to be paid and other costs related to the Company's claims and
defenses for these matters (see Item 3, Legal Proceedings, of Part I and Note
8 of Notes to Consolidated Financial Statements). In the first quarter of
1995, the Company recorded a credit of $1.7 million as a further adjustment to
the estimated costs of settling its securities class action which were
recorded in the fourth quarter of 1994 (see Note 8 of Notes to Consolidated
Financial Statements).
<PAGE>25
As previously disclosed, in December 1994, the Company reached an agreement,
which was subsequently approved on May 26, 1995 by the United States District
Court for the District of South Carolina, to settle its shareholder class
action. The settlement of $31 million was paid by the Company's Directors'
and Officers' Liability Insurance Carrier, the Company's former accountants
and the Company. The Company's portion of the settlement and associated
litigation costs resulted in a special one-time charge of $34.2 million ($21.3
million after tax) in the fourth quarter of 1994. This represents the
Company's portion of the total settlement, plus the Company's litigation costs
of $18.1 million ($11.2 million after tax), less the recovery from the
insurance company. In March 1995, the Company and its insurance carrier
signed an agreement to settle amounts contested and the carrier agreed to pay
an additional amount of $1.7 million in full settlement of the Company's
claims. Accordingly, the Company recorded a credit of $1.7 million, in the
first quarter of 1995, as a further adjustment to the estimated costs of
settling the securities class action.
As a result of growth in the Company's existing client/user base, the addition
of new outsourcing customers and advances in central processing unit
technology, the Company, during the fourth quarter of 1995, restructured its
data processing facilities by beginning migration from BIPOLAR technology to
newer CMOS technology. This migration will enable the Company to employ the
latest technology in its data center operations and improve the quality of
service provided to its customers, as well as take advantage of significant
projected future cost savings provided by the efficiency of the new technology
and industry projections for decreasing unit costs of this technology. The
Company entered into 2 and 4 year renewable lease agreements to acquire this
technology (see Notes 4 and 8 of Notes to Consolidated Financial Statements),
which will also allow the Company to take advantage of technological advances
in this area without the large capital burden and lack of flexibility
resulting from the outright purchase of such technology. As a result of the
migration, the Company disposed of its existing data processing equipment,
with a net book value of $18.0 million, for $4.2 million in cash, and recorded
a one-time charge on the disposition of this equipment of $13.8 million.
Concurrent with this technology upgrade, the Company upgraded certain of its
data storage equipment to a more advanced architecture. As consideration for
these storage systems upgrades, the Company exchanged existing data storage
systems, with an aggregate net book value of $6.0 million, and paid $2.0
million cash, resulting in a one-time charge of $4.6 million. These one-time
charges, aggregating $18.4 million, are recorded under Loss on disposition of
data processing equipment in the accompanying Consolidated Statement of
Operations for the year ended December 31, 1995.
The increase of $15.3 million (27.9%)in other operating costs and expenses
from 1994 to 1995 is principally attributable to an increase in the Company's
use of outside consultants and independent contractors relating to increased
professional services activities and costs of Creative, acquired at December
31, 1994. Additionally, the Company experienced increased operating costs
associated with increased total policy management outsourcing services
activity (see Revenue discussion above). These increases were offset in part
by an increase in amounts capitalized, principally associated with the
internal development of the Company's property and casualty insurance and life
insurance client/server software systems and by a decrease in general legal
costs.
Other operating costs and expenses for 1994 decreased $14.8 million (21.3%)
compared with 1993. The decrease is primarily attributable to $16.4 million
of 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 related
charges recorded in June, 1993. In addition to these charges, other operating
costs and expenses declined as a result of reduced costs associated with
equipment sold, a decrease in costs associated with the wind-down of the New
Jersey MTF project, a decrease associated with the recovery of certain
receivables previously written off, and an increase in amounts capitalized
principally related to the internal development of the Company's life software
systems. These decreases were partially offset by an increase in operating
costs associated with providing total policy management outsourcing services
for new customers.
Operating Income
Operating income, after the effects of the gain from the sale of the Health
Division and special charges, was $8.6 million for the year ended December 31,
1995. The Company on June 30, 1995, recorded a gain from the sale of the
Company's Health Division of approximately $8.1 million (see Note 11 of Notes
to Consolidated Financial Statements). Special charges aggregating $64.6
million recorded during the year ended December 31, 1995 relate to impairment
and restructuring charges, net ($10.6 million), litigation settlement and
other legal expenses ($18.5 million), charges incurred in connection with the
restructure of the Company's data center facilities ($18.4 million), and
certain charges related to business acquisitions ($17.1 million).
The Company incurred operating losses of $19.7 and $77.1 million for 1994 and
1993, respectively. These losses were solely attributable to various special
charges aggregating $71.9 and $98.8 million, respectively. As discussed
above, special charges in 1994 relate to impairment and restructuring charges
($35.1 million), charges related to the write-off of purchased research and
development costs arising out of the Company's acquisition of Creative in
December 1994 ($2.6 million) and charges related to settling the Company's
securities class action ($34.2 million). The special charges in 1993 of $98.8
million relate to impairment and restructuring charges of $80.7 million and
$18.1 million related to the June 30, 1993 special charge discussed above (see
Costs and Expenses).
Operating income, excluding the gain and special charges, was $65.1 million
for 1995, compared with $52.2 million for 1994 and $21.7 million for 1993.
The consecutive increases in operating income from 1993 through 1995,
excluding the gain and special charges, results principally from increases in
initial license revenues from both property and casualty and life insurers of
$17.3
<PAGE>26
million from 1994 to 1995 and $5.1 million from 1993 to 1994, increases in
professional and outsourcing services revenues from new international services
contracts and new and existing contracts with domestic property and casualty
insurance companies and residual markets of $51.3 million from 1994 to 1995
and $29.2 million from 1993 to 1994, and from increases in new professional
and outsourcing services revenues from life insurers of $16.4 million from
1994 to 1995 and $24.4 million from 1993 to 1994, principally the result of
the acquisition of CYBERTEK in 1993 (see Revenues). Operating income, as a
percentage of total revenues, excluding the effects of the gain and special
charges as described above, increased to 12.1% for 1995 from 9.7% for 1994 and
4.8% for 1993.
Licensing revenues, as a percentage of total revenues, increased from 16.5% of
total revenues for 1993 to 18.1% for 1994 and 19.0% for 1995 (see Revenues).
Excluding the effect of licensing revenues from the Company's health division
(sold on June 30, 1995 - see Note 11 of Notes to Consolidated Financial
Statements) of $3.8 million for 1993, $7.2 million for 1994, and $.3 million
for 1995, licensing revenues as a percentage of total revenues increased from
15.8% for 1993 to 16.9% for 1994 and 19.0% for 1995. A significant portion of
both the Company's revenues 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 are recorded at
the time systems are licensed, there can be significant fluctuations from
quarter-to-quarter and year-to-year in the revenues and operating income
derived from licensing activities. This is attributable principally to the
timing of customers' decisions to enter into license agreements with the
Company, which the Company is unable to control.
Set forth below is a comparison of initial license revenues by quarter
expressed as a percentage of total initial license revenues and total revenues
for each of the years presented:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
(Dollars In Millions)
1995 $11.9 $ 9.5 $11.3 $16.1 $ 48.8
Initial license revenues 24.5% 19.4% 23.1% 33.0% 100.0%
Total revenues 8.9% 7.1% 8.6% 11.6% 9.1%
1994 $ 3.6 $10.4 $14.3 $ 9.8 $ 38.1
Initial license revenues 9.5% 27.4% 37.6% 25.5% 100.0%
Total revenues 3.1% 8.4% 11.3% 7.8% 7.7%
1993 $ 8.2 $11.9 $ 3.4 $ 3.0 $ 26.5
Initial license revenues 31.1% 45.0% 12.8% 11.1% 100.0%
Total revenues 6.9% 10.2% 3.1% 2.7% 5.8%
Revenues from professional and outsourcing services activities, as a function
of total revenues increased from 40.5% for 1993 to 42.3% for 1994 and 48.4%
for 1995 (see Revenues). Excluding the effects of professional and outsourcing
services revenues from the Company's health division (sold on June 30, 1995 -
see Note 11 of Notes to Consolidated Financial Statements) of $30.2 million
for 1993, $23.1 million for 1994, and $7.1 million for 1995, professional and
outsourcing revenues as a percentage of total revenues increased from 36.3%
for 1993 to 39.5% for 1994, and 47.7% for 1995.
During 1994, the Company's life insurance systems business benefited from an
increase of $14.8 million in licensing revenues and $24.4 million in
professional and outsourcing services, which includes the results of CYBERTEK.
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 components of the Company's
Series III applications, had the effect of significantly reducing revenues and
operating income from the life insurance services business in the short-term.
The information services businesses, which include property and casualty as
well as life information services, produced a combined operating loss for 1994
of $2.9 million. The property and casualty information services business
produced an aggregate operating loss of $6.1 million. These results were also
weaker than 1993 when the property and casualty business produced an operating
loss of $4.6 million, resulting in operating income of $.4 million for all
information services. The 1994 performance in property and casualty was
reflective of increasing price competition and changing market conditions.
During 1994 and 1995, the Company took measures to evaluate and improve the
property and casualty information services businesses. Nevertheless, the
property and casualty information services business reported a 1995 operating
loss of $5.1 million. As a result, the Company decided to cease providing
certain property and casualty risk information services (see Note 12 of Notes
to Consolidated Financial Statements). Despite growth in the Company's life
information services businesses (see Revenues), aggregate information services
revenues, which generally produce lower margins than professional and
outsourcing services, as a percentage of total revenues has decreased from
42.3% for 1993, to 39.2% for 1994 and 32.1% for 1995.
<PAGE>27
Other Income and Expenses
During 1994, the Company made large cash expenditures for the acquisition of
Creative ($19.9 million) in December 1994, the repurchase of 2,278,537 of the
3,797,561 shares of common stock held by IBM ($56.6 million) in May 1994, the
repurchase during the last half of 1994 of 995,500 shares of the Company's
outstanding common stock on the open market ($35.3 million) under its 2.5
million share repurchase authorization and payments to settle the shareholder
class action and related expenses made principally during the fourth quarter
of 1994. Consequently, the Company maintained a lower level of investable
funds during 1995, resulting in a decrease in investment income of $3.4
million.
Investment income decreased $3.8 million for 1994 compared with 1993, as a
result of a lower level of investable funds, resulting from large cash
expenditures for the acquisition of CYBERTEK ($59.7 million) in August 1993,
the repurchase in April 1993 of 970,668 shares of the Company's common stock
($48.7 million), the above described purchases in 1994 of the Company's common
stock and to a decrease in interest income related to long-term accounts
receivable.
As part of the Company's repurchase of 2,278,537 shares of its common stock
held by IBM, at a price of $24.71 per share, and the open market repurchase of
995,500 shares of common stock, the Company liquidated a portion of its
marketable securities portfolio. The Company incurred a loss on the sale of
securities of $1.9 million related directly to this liquidation during 1994
(see Note 11 of Notes to Consolidated Financial Statements).
Income taxes
The effective income tax (benefit) rate (income taxes expressed as a
percentage of pre-tax income) was 61.1%, (47.8%) and (15.5%) for the years
ended December 31, 1995, 1994, and 1993, respectively. The effective tax
benefit rate in 1993 was significantly lower than the statutory rate due to
the nontaxable write-off of goodwill related to impairment (see Note 12 of
Notes to Consolidated Financial Statements). The effective tax benefit rate
in 1994 changed significantly, due principally to the Company's settlement
with the Internal Revenue Service relating to all issues in the 1985 through
1990 examinations. As a result of this settlement, the Company's 1994
provision for income taxes reflected a $6.0 million reduction of taxes
provided in prior periods. The effective income tax benefit rate for 1994
also 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 income tax rate for 1995 increased further as the result
of the Company's expensing, for book purposes, purchased research and
development associated with its October 1, 1995 acquisition of micado (see
Note 2 of Notes to Consolidated Financial Statements), nontaxable write-offs
of goodwill impairment (see Note 12 of Notes to Consolidated Financial
Statements) and differences between the amortization of goodwill for book and
income tax purposes. These effects were offset, in part, by the higher tax
basis than book basis of the assets divested related to the sale of the
Company's Health Insurance Systems Division (see Note 11 of Notes to
Consolidated Financial Statements) and differences between the U.S. tax rate
and tax rates imposed on the income of foreign subsidiaries.
Liquidity and Capital Resources
December 31,
1995 1994
(In Millions)
Cash and equivalents, marketable securities
and investments $ 44.6 $ 34.3
Current assets 203.5 167.7
Current liabilities 105.5 76.8
Working capital 98.0 90.9
Current portion of long-term debt 1.8 4.7
Long-term debt 14.9 4.2
Cash provided by operations 104.7 59.9
Cash (used) provided by investing activities (98.6) 33.9
Cash provided (used) by financing activities 10.8 (98.9)
The Company's financial condition remained strong at December 31, 1995. The
increase in cash and equivalents, marketable securities and investments
compared to December 31, 1994 is due principally to cash flows generated by
operations, and proceeds from the Company's unsecured credit facilities
(discussed below). The Company's current ratio (current assets divided by
current liabilities) as of December 31, 1995, decreased slightly from 1994,
principally as a result of litigation costs accrued for during 1995 (see Cost
and Expenses above and Note 8 of Notes to Consolidated Financial Statements).
<PAGE>28
Cash provided by operations increased as a result of several factors,
including principally the Company's reporting net income for 1995 as opposed
to a net loss for 1994, the increase in accounts payable from year-to-year and
the Company's liquidation of a portion of its income tax receivable during
1995.
During 1995, the Company reduced its liabilities for accrued restructuring
charges and employee severance and outplacement costs by $2.5 million. This
reduction included cash outlays of $8.0 million, less $.8 million in non-cash
discount amortization. These reductions were offset in part by $1.2 million in
additional reserves established in connection with the Company's sale of its
health division (see Note 11 of Notes to Consolidated Financial Statements),
and $3.7 million in reserves established for the restructure of the Company's
property and casualty risk information services business (see Note 12 of Notes
to Consolidated Financial Statements).
During 1994, as part of the Company's repurchase of 3.2 million shares of its
common stock and payments to settle its securities class action, the Company
liquidated a portion of its marketable securities and had net positive cash
flow from marketable securities sales/purchasing activity of $112.9 million.
The Company did not repurchase any of its outstanding common shares during
1995, and had no significant sales/purchases of securities during this period
beyond normal maturities and repurchases.
During 1995, the Company expended $10.0 million to acquire a significant
outsourcing contract (see Note 8 of Notes to Consolidated Financial
Statements) and $28.2 million to acquire a business in Germany (see Note 2 of
Notes to Consolidated Financial Statements). Additionally, the Company's
capitalization of software development costs from 1994 to 1995 increased by
$16.1 million, principally related to the development of its Series III
property and casualty insurance software and CyberLife life insurance
software.
On August 11, 1995 the Company entered into two unsecured credit facilities of
$100 million each with a syndicate of financial institutions. These lines of
credit may be used for general corporate purposes (see Note 7 of Notes to
Consolidated Financial Statements). During 1995, the Company utilized these
facilities to fund, in part, the acquisition of a business in Germany (see
Note 2 of Notes to Consolidated Financial Statements) and other assets during
the fourth quarter of 1995.
Significant expenditures planned for 1996, excluding any possible business
acquisitions and stock repurchases, are as follows: acquisition of data
processing and communications equipment, support software, building
improvements and office furniture, fixtures and equipment ($9.1 million);
costs relating to the internal development of software systems ($51.0
million); and payments relating to past business acquisitions ($6.2 million).
On March 14, 1996, the Company announced that it had agreed with GAP
Coinvestment Partners and General Atlantic Partners 14 L.P. (collectively
"General Atlantic Investors") to repurchase 759,512 of the 1,519,024 shares
of the Company's common stock held by the General Atlantic Investors. The
repurchase by the Company, at $50.00 per share, approximates an aggregate
cash expenditure of $38.0 million. This share repurchase, which is to be
financed principally through borrowings under the Company's credit
facilities, is expected to be completed during the second quarter of 1996
(see Note 15 of Notes to Consolidated Financial Statements). The remaining
759,512 of the Company's shares owned by General Atlantic Investors will
be purchased by Continental Casualty Company, one of the nation's largest
insurance companies and a licensee of the Company's Series III Solutions.
The Company has historically used the cash generated from operations for the
development and acquisition of new products, acquisition of businesses and
repurchase of the Company's stock. The Company anticipates that, subject to
market condition, 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 discussed above, as needed to accomplish specific objectives in these
areas and for other general corporate purposes.
Factors That May Affect Future Results
The Company's operating results and financial condition can be impacted by a
number of factors, including the following, any of which could cause actual
results to vary materially from current and historical results or the
Company's anticipated future results.
Currently, the Company's business is focused principally within the global
property and casualty and life insurance industries. Significant changes in
the regulatory or market environment of these industries could impact demand
for the Company's software products and services. Additionally, there is
increasing competition for the Company's products and services, and there can
be no assurance that the Company's current products and services will remain
competitive, or that the Company's development efforts will produce products
with the cost and performance characteristics necessary to remain competitive.
Furthermore, the market for the Company's products and services is
characterized by rapid changes in technology. The Company's success will
depend on the level of market acceptance of the Company's products,
technologies and enhancements, and its ability to introduce such products,
technologies and enhancements to the market on a timely and cost effective
basis, and maintain a labor force sufficiently skilled to compete in the
current environment.
Contracts with governmental agencies involve a variety of special risks,
including the risk of early contract termination by the governmental agency
and changes associated with newly elected state administrations or newly
appointed regulators.
The timing and amount of the Company's revenues are subject to a number of
factors, including, but not limited to, the timing of customers' decisions to
enter into large license agreements with the Company, which make estimation of
operating results prior to the end of a quarter or year extremely uncertain.
Additionally, while management believes that the Company's financing needs for
<PAGE>29
the foreseeable future will be satisfied from cash flows from operations and
the Company's currently existing credit facilities, unforeseen events or
adverse economic or business trends may significantly increase cash demands
beyond those currently anticipated or affect the Company's ability to
generate/raise cash to satisfy financing needs.
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. This is attributable principally to
the timing of customers' decisions to enter into license agreements with the
Company, which the Company is unable to control.
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.
______________________________________
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: Statements in this annual report that are not descriptions of historical
facts may be forward-looking statements that are subject to risks and
uncertainties, including economic, competitive and technological factors
affecting the Company's operations, markets, products, services and prices, as
well as other specific factors discussed in Note 14 of Notes to Consolidated
Financial Statements and elsewhere herein and in the Company's filings with
the Securities and Exchange Commission. These and other factors may cause
actual results to differ materially from those anticipated.
<PAGE>30
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial
Statements and Supplementary Data
Page
Report of Independent Accountants 30
Consolidated Financial Statements and Notes:
Consolidated Statements of Operations for
the years ended December 31,
1995, 1994 and 1993 31
Consolidated Balance Sheets as of December 31,
1995 and 1994 32
Consolidated Statements of Changes in Stockholders'
Equity for the years
ended December 31, 1995, 1994 and 1993 33
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1994 and 1993 34
Notes to Consolidated Financial Statements 35
Quarterly Consolidated Results of Operations 54
Supplemental Schedules:
Schedule II - Valuation and Qualifying Accounts 55
Report of Independent Accountants 56
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>31
Policy Management Systems Corporation
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, 1995 and
1994 and the related statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1995. 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.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Policy
Management Systems Corporation and subsidiaries as of December 31, 1995 and
1994 and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
Coopers & Lybrand
Atlanta, Georgia
February 12, 1996
<PAGE>32
<TABLE>
Policy Management Systems Corporation
Consolidated Statements of Operations
<CAPTION>
Year Ended December 31,
1995 1994 1993
(In Thousands, Except Per
Share Data)
<S> <C> <C> <C>
Revenues:
Licensing $102,092 $ 89,083 $ 74,664
Services 435,210 403,623 378,435
537,302 492,706 453,099
Costs and Expenses:
Employee compensation and benefits 196,885 174,822 167,678
Computer and communications expenses 30,895 25,426 22,440
Information services and data
acquisition costs 113,536 132,484 130,267
Impairment and restructuring charges
, net 10,606 30,728 80,733
Depreciation and amortization of
property, equipment and intangibles 60,700 57,326 59,289
Business acquisition charges 2,573 - -
Purchased research and development 14,500 2,551 -
Litigation settlement and expenses, net 18,465 34,194 -
Gain on sale of Health business
and related assets (8,139) - -
Loss on disposition of data processing
equipment 18,422 - -
Other operating costs and expenses 70,235 54,920 69,745
528,678 512,451 530,152
Operating income (loss) 8,624 (19,745) (77,053)
Other Income and Expenses:
Investment income 2,764 6,114 9,898
(Loss) gain on sale of marketable
securities - (1,857) 3,388
Interest expense and other charges (3,307) (3,001) (2,630)
(543) 1,256 10,656
Income (loss) before income taxes
(benefit) 8,081 (18,489) (66,397)
Income taxes (benefit) 4,942 (8,831) (10,263)
Net income (loss) $ 3,139 $ (9,658) $ (56,134)
Net income (loss) per share $ .16 $ (.46) $ (2.46)
Weighted average number of shares 19,391 20,865 22,858
<FN>
See accompanying notes.
</TABLE>
<PAGE>33
<TABLE>
Policy Management Systems Corporation
Consolidated Balance Sheets
<CAPTION>
December 31,
1995 1994
(In Thousands,
Except Share Data)
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 35,094 $ 17,686
Marketable securities 4,615 11,051
Receivables, net of allowance for
uncollectible amounts
of $2,042 ($1,024 at 1994) 95,740 90,474
Income tax receivable 25,089 31,072
Deferred income taxes 25,144 6,644
Other 17,833 10,798
Total current assets 203,515 167,725
Property and equipment, net 109,183 136,503
Receivables 5,885 500
Goodwill and other intangibles, net 89,319 77,763
Capitalized software costs, net 145,982 118,621
Deferred income taxes 12,793 12,453
Investments 4,905 5,567
Other 5,492 4,899
Total assets $577,074 $524,031
Liabilities
Current liabilities:
Accounts payable and accrued expenses $ 70,589 $ 50,231
Accrued restructuring charges 9,456 5,648
Accrued contract termination costs 1,154 1,819
Current portion of long-term debt 1,766 4,734
Income taxes payable 11,123 2,279
Unearned revenues 11,350 11,930
Other 84 215
Total current liabilities 105,522 76,856
Long-term debt 14,873 4,162
Deferred income taxes 66,929 54,671
Accrued restructuring charges 4,439 10,796
Other 2,639 624
Total liabilities 194,402 147,109
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, 19,436,114
shares issued and outstanding
(19,362,984 at 1994) 194 194
Additional paid-in capital 173,402 170,323
Retained earnings 210,113 206,974
Foreign currency translation adjustment (1,037) (451)
Unrealized holding loss on marketable
securities - (118)
Total stockholders' equity 382,672 376,922
Total liabilities and
stockholders' equity $577,074 $524,031
<FN>
See accompanying notes.
</TABLE>
<PAGE>34
<TABLE>
Policy Management Systems Corporation
Consolidated Statements of Changes in Stockholders' Equity
<CAPTION>
Unrealized
Foreign Holding
Additional Currency Loss on
Common Paid-In Retained Translation Marketable
Stock Capital Earnings Adjustment Securities Total
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1992 $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
Net loss - - (9,658) - - (9,658)
Repurchase of
3,274,037 shares
of common stock,
net of expenses (32) (91,844) - - - (91,876)
Unrealized holding
loss on marketable
securities - - - - (118) (118)
Foreign currency
translation
adjustment - - - 1,602 - 1,602
Balance,
December 31, 1994 194 170,323 206,974 (451) (118) 376,922
Net income - - 3,139 - - 3,139
Stock options exercised
(73,130 shares) - 3,079 - - - 3,079
Unrealized holding
gain on marketable
securities - - - - 118 118
Foreign currency
translation
adjustment - - - (586) - (586)
Balance,
December 31, 1995 $194 $173,402 $210,113 $ (1,037) $ - $382,672
<FN>
See accompanying notes.
</TABLE>
<PAGE>35
<TABLE>
Policy Management Systems Corporation
Consolidated Statements of Cash Flows
<CAPTION>
Year Ended December 31,
1995 1994 1993
(In Thousands)
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 3,139 $ (9,658) $ (56,134)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 60,700 58,813 63,157
Deferred income taxes (13,125) (8,192) (2,997)
Loss (gain) on sale of marketable
securities - 1,857 (3,388)
Provision for uncollectible accounts 567 955 1,768
Impairment charges 6,756 33,089 54,890
Loss on disposition of data
processing equipment 18,422 - -
Purchased research and development 14,500 2,551 -
Business acquisition charges 2,573 - -
Changes in assets and liabilities:
Accrued restructuring and lease
termination costs (1,713) (11,595) 25,843
Receivables (5,901) 10,351 19,748
Income tax receivable 5,983 (12,299) (15,873)
Accounts payable and accrued expenses 16,911 2,241 (1,460)
Income taxes payable 8,404 1,104 1,327
Other, net (12,541) (9,356) (6,058)
Cash provided by operations 104,675 59,861 80,823
Investing Activities
Proceeds from sales/maturities of
marketable available-for-sale
securities 25,000 341,250 382,973
Purchases of available-for-sale
securities (19,966) (228,313) (296,344)
Proceeds from maturities of
held-to-maturity securities 5,736 2,217 -
Purchases of held-to-maturity
securities (3,694) (1,823) -
Acquisition of property and equipment (24,483) (24,774) (39,272)
Capitalized internal software
development costs (46,770) (30,666) (24,698)
Purchased software (711) (418) (4,336)
Proceeds from disposal of property
and equipment 4,555 (580) 9,062
Contract acquisition costs (10,000) - -
Business acquisitions (28,231) (22,955) (66,261)
Cash (used) provided by
investing activities (98,564) 33,938 (38,876)
Financing Activities
Payments on long-term debt (20,002) (6,992) (3,681)
Proceeds from borrowing under
credit facility 27,678 - -
Issuance of common stock under
stock option plans 3,079 - 690
Issuance of common stock to
employee benefit plan - - 1,850
Repurchase of outstanding common stock - (91,876) (48,660)
Cash provided (used) by
financing activities 10,755 (98,868) (49,801)
Effect of exchange rate changes on cash 542 (1,367) 17
Net increase (decrease) in cash and
equivalents 17,408 (6,436) (7,837)
Cash and equivalents at beginning of
period 17,686 24,122 31,959
Cash and equivalents at end of period $ 35,094 $ 17,686 $ 24,122
Noncash Activities
Long-term debt arising from and assumed in
connection with business acquisitions $ - $ 2,347 $ 6,580
Supplemental Information
Interest paid 2,323 2,342 1,579
Income taxes paid 2,793 10,249 13,431
<FN>
See accompanying notes.
</TABLE>
<PAGE>36
Policy Management Systems Corporation
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 (the Company) all of which are wholly-owned. All material
intercompany balances and transactions have been eliminated. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Certain amounts previously
presented in the consolidated financial statements for prior periods have been
reclassified to conform to current classifications.
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 worldwide 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, if collectibility is probable and
no significant vendor obligations remain. 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 and enhancements, which are provided under separate
arrangements during the MESA term.
The Company provides professional support services, including systems
implementation and integration assistance, 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 does from time to time enter into certain joint development
arrangements. Although these arrangements are varied, the Company principally
will undertake custom development of a product or enhancement and typically
retain all marketing rights and titles to such development. The Company does,
however, have certain joint marketing arrangements. Joint development
arrangements are generally provided for under fixed price agreements and in
some circumstances on a time and material basis. The Company recognizes
revenue on the same basis as professional support services; however, where
technological feasibility has already been established, the Company will
capitalize the portion of development costs which exceed customer funding
provided under the joint development arrangement.
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, while agreements to provide information
services have terms from one to five years, and in some cases month-to-month.
Revenues from substantially all outsourcing and information services are
recognized at the time the service is performed and losses, if any, are
recognized in the period in which they are determined.
Marketable Securities
Prior to January 1, 1994, interest-bearing marketable securities were stated
at amortized cost, which approximated market value. Current marketable
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.
Effective January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" (FAS 115). Pursuant to FAS 115, debt securities
included in the Company's investment portfolio for which there is a positive
intent and ability to hold to maturity are carried at amortized cost.
<PAGE>37
Debt securities that may be sold prior to maturity and all marketable equity
securities are classified as available-for-sale and carried at fair value.
The fair value is estimated based on quoted market prices for those or similar
investments. Net unrealized gains and losses, determined on the specific
identification method, on securities classified as available-for-sale are
carried as a separate component of Stockholder's Equity. The Company's
adoption of FAS 115 did not have a material impact on the financial statements
taken as a whole. In accordance with the statement, prior period financial
statements have not been restated to reflect the change in accounting
principle.
Investment securities with maturities of three months or less at the time of
acquisition are considered cash equivalents.
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.
Gains and losses on dispositions of property and equipment are determined
based on the difference between the cash plus the fair value of any assets
received (in the case of a nonmonetary transaction) less the net book value of
the asset disposed of at the date of disposition.
Goodwill and Other Acquired Intangible Assets
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 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 and recoverability of the carrying
value of such assets based upon the latest available economic factors and
circumstances. The Company evaluates the 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. Impairment of value, if any, is recognized in the period in
which it is determined.
The Company amortizes 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 lives 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.
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.
Capitalized Software Costs
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed" (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. The Company
amortizes such software costs over five years and uses the straight-line
method over the estimated useful life. 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 $.9, $2.5 and $2.7million for the years ended December 31, 1995, 1994 and
1993, respectively. The Company also recorded write-offs of $14.5 and $2.6
million representing purchased research and development costs during 1995 and
1994, respectively (see Note 2). The amount by which unamortized software
costs exceeds the net realizable value, if any, is recognized in the period it
is determined.
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 (Loss) Per Share
Net income (loss) per share is based upon the weighted average number of
common shares outstanding. Outstanding stock
options are common stock equivalents, and are excluded from the computation of
net income (loss) per share since their dilutive effect is immaterial.
<PAGE>38
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.
New Accounting Standards
The American Institute of Certified Public Accountants has issued Statement of
Position 93-7 (SOP 93-7), "Reporting on Advertising Costs," which is effective
for fiscal years beginning after June 15, 1994. SOP 93-7 generally requires
that advertising costs, with certain exceptions, be expensed as incurred or
the first time the advertising takes place. As the Company has historically
expensed advertising costs as incurred, the effects of the Company's adoption
of SOP 93-7 during 1995 did not have a material effect on the Company's
consolidated financial statements. Advertising expenses for 1995, 1994 and
1993 were $.6, $.5 and $.4 million, respectively.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Assets to be Disposed Of" (SFAS 121). The Statement
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the expected future
cash flows of those assets are less than the assets' carrying amount. SFAS 121
also addresses the accounting for long-lived assets that are expected to be
sold or discarded. The Company will adopt SFAS 121 in 1996. As the Company's
accounting policies have provided for similar accounting treatment, the effect
of adoption is not expected to be material to the Company's financial
condition or results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), which the Company will adopt in 1996. This Statement
requires that companies with stock-based compensation plans either recognize
compensation expense based on new fair value accounting methods or continue to
apply the provisions of Accounting Principles Board Opinion No. 25 and
disclose pro forma net income and earnings per share assuming the fair value
method had been applied. The Company is evaluating the new statement and will
determine whether to adopt the recognition or disclosure alternative of the
statement in the first quarter of 1996. Neither alternative is expected to
have a material effect on the Company's results of operations or financial
condition.
<PAGE>39
Note 2. Acquisitions
On October 1, 1995, the Company acquired micado Beteiligungs-und Verwaltungs
GmbH (micado). Headquartered in Germany, micado is principally a software
provider to German insurance and financial services companies. The acquisition
was financed principally from cash provided by operations and borrowings under
the Company's credit facilities.The acquisition has been recorded using the
purchase method of accounting. Accordingly, the Consolidated Statement of
Operations for the year ended December 31, 1995, includes the results of
operations of micado from the date of acquisition. In connection with the
acquisition, the Company recorded an estimated liability of $.4 million at
October 1, 1995, included in Impairment and restructuring charges, net in the
accompanying Consolidated Statements of Operations, to provide for certain
relocation and severance costs of consolidating existing operations in Germany
with micado. At October 1, 1995, the Company also recorded a charge of $14.5
million representing purchased research and development for which
technological feasibility had not yet been established and for which there is
no alternative future use. Under the terms of the purchase agreement, payment
of approximately $6.2 million of the purchase price has been deferred and is
payable at certain intervals over the year subsequent to the date of
acquisition.
On December 31, 1994, the Company acquired all of the outstanding capital
stock of Creative Group Holdings, Limited (Creative). Creative, headquartered
in the United Kingdom, is a British holding company whose wholly-owned
subsidiaries provide software consulting, development, licensing and financing
services to medium-sized general insurance companies. Creative has offices in
England, Australia and Southeast Asia. The acquisition of Creative was
recorded using the purchase method of accounting. Accordingly, the
Consolidated Statement of Operations of the Company for the year ended
December 31, 1994, does not include the results of operations of Creative for
the period. The Consolidated Balance Sheet as of December 31, 1994, includes
the assets and liabilities as of that date. In connection with the
acquisition, the company recorded an estimated liability of $2.0 million at
December 31, 1994, to provide for the costs of terminating the Company's
existing lease obligations in the United Kingdom ($1.8 million) and relocation
and severance costs of consolidating its existing operations in the United
Kingdom with Creative ($.2 million). These costs are included in Impairment
and restructuring charges, net in the accompanying Consolidated Statements of
Operations for the year ended December 31, 1994. At December 31, 1994, the
Company also recorded a charge of $2.6 million representing purchased research
and development for which technological feasibility had not yet been
established and for which there is no alternative future use.
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 had over 20 years of
experience in serving the data processing needs of the life insurance industry
by designing and delivering a combination of data processing services,
consulting services, and software. The acquisition was recorded using the
purchase method of accounting. Accordingly, the Consolidated Statement of
Operations of the Company for the year ended December 31, 1993 includes the
results of operations of CYBERTEK only from the date of acquisition.
The total costs of the above acquisitions were determined, and assigned to the
net assets acquired, as follows:
<TABLE>
<CAPTION>
micado Creative CYBERTEK
1995 1994 1993
(In Thousands)
<S> <C> <C> <C>
Total consideration paid $30,806 $19,634 $58,152
Direct costs of acquisition 915 304 1,575
Total cost to be assigned to net assets acquired 31,721 19,938 59,727
Add - Liabilities assumed. 12,762 8,789 13,876
Less - Cost assigned to tangible and identifiable
intangible assets acquired 25,840 15,560 47,338
- Write-off of purchased research and
development 14,500 2,551 -
Cost assigned to goodwill $ 4,143 $10,616 $26,265
</TABLE>
Supplemental pro-forma information is not presented since these acquisitions
were not material to the Company's consolidated results of operations taken as
a whole.
During the fourth quarter of 1995, the Company recorded charges aggregating
$2.6 million relating principally to costs, previously deferred, of an
acquisition in Europe which was expected to close during the fourth quarter of
1995 and was not consummated.
<PAGE>40
Note 3. Marketable Securities
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," debt
securities for which there is a positive intent and ability to hold to
maturity are carried at amortized cost. Debt securities that may be sold
prior to maturity and all marketable equity securities are classified as
available-for-sale and carried at fair value. Net unrealized gains and losses
on securities classified as available-for-sale are carried as a separate
component of Stockholders' Equity. The Company has no securities classified
as trading securities.
Realized gains and losses are included in net income and the cost of
securities sold is based on the specific identification method. There were no
sales of marketable securities during the year ended December 31, 1995. For
the year ended December 31, 1994, the Company received $145.9 million proceeds
from sales of available-for-sale securities, and recognized $1.9 million in
gross realized losses, based on the specific identification method. The net
unrealized holding gain on available-for-sale securities for the years ended
December 31, 1995 and 1994, included as a component of shareholder's equity is
a gain of $.1 million and loss of $.1 million, respectively. There were no
sales or transfers of debt securities out of the held-to-maturity category
during the year ended December 31, 1995.
As of December 31, 1993, the amortized cost of the Company's marketable
securities was $132.6 million, with a market value of $135.0 million.
The following is a summary of available-for-sale and held-to-maturity
securities included in marketable securities as of December 31, 1995:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Unrealized
Cost Market Gains Losses
(In Thousands)
<S> <C> <C> <C> <C>
Available-for-Sale Securities:
Short-Term
Municipal bonds and notes $ 3,005 $ 3,005 $ 7 $ (7)
U.S. Government bonds and notes 1,001 1,001 - -
Total $ 4,006 $ 4,006 $ 7 $ (7)
Held-to-Maturity Securities:
Short-Term
Municipal bonds and notes $ 609 $ 611 $ 2 $ -
U.S. Government bonds and notes - - - -
609 611 2 -
Long-Term
Municipal bonds and notes 4,905 4,981 76 -
U.S. Government bonds and notes - - - -
4,905 4,981 76 -
Total $ 5,514 $ 5,592 $ 78 $ -
</TABLE>
<PAGE>41
The following is a maturity summary of the available-for-sale and the held-to-
maturity securities included in marketable securities as of December 31, 1995:
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
Amortized Amortized
Cost Market Cost Market
(In Thousands)
<S> <C> <C> <C> <C>
Due within 1 year $ 2,013 $ 2,019 $ 609 $ 611
Due after 1 year through 5 years 1,993 1,987 2,564 2,593
Due after 5 years through 10 years - - 2,341 2,388
Due after 10 years - - - -
Total $ 4,006 $ 4,006 $ 5,514 $ 5,592
</TABLE>
The following is a summary of available-for-sale and held-to-maturity
securities included in marketable securities as of December 31, 1994:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Unrealized
Cost Market Gains Losses
(In Thousands)
<S> <C> <C> <C> <C>
Available-for-Sale Securities:
Short-Term
Municipal bonds and notes $ 1,000 $ 1,000 - -
U.S. Government bonds and notes 2,957 2,942 - $ (15)
3,957 3,942 - (15)
Long-Term
Municipal bonds and notes 4,033 3,946 $ 11 (98)
U.S. Government bonds and notes 1,032 1,016 - (16)
5,065 4,962 11 (114)
Total $ 9,022 $ 8,904 $ 11 $ (129)
Held-to-Maturity Securities:
Short-Term
Municipal bonds and notes $ 102 $ 101 $ - $ (1)
U.S. Government bonds and notes 2,045 1,983 - (62)
2,147 2,084 - (63)
Long-Term
Municipal bonds and notes 5,567 5,320 - (247)
U.S. Government bonds and notes - - - -
5,567 5,320 - (247)
Total $ 7,714 $ 7,404 $ - $ (310)
<PAGE>42
Note 4. Property and Equipment
A summary of property and equipment is as follows:
</TABLE>
<TABLE>
<CAPTION>
Estimated December 31,
Useful Life 1995 1994
(Years) (In Thousands)
<S> <C> <C> <C>
Cost:
Land - $ 2,566 $ 2,566
Buildings and improvements 10-40 61,649 60,456
Construction in progress - 121 461
Leasehold improvements 1-10 2,220 2,407
Office furniture, fixtures and equipment 5-15 40,540 42,828
Data processing and communications equipment
and support software 2-5 100,742 149,026
Other 3-5 4,913 4,360
212,751 262,104
Less: Accumulated depreciation and amortization (103,568) (125,601)
Property and equipment $ 109,183 $ 136,503
</TABLE>
Depreciation and amortization charged to expense was $28.1, $28.7 and $27.2
million for the years ended December 31, 1995, 1994 and 1993, respectively.
As a result of growth in the Company's existing client/user base, the addition
of new outsourcing customers and advances in central processing unit
technology, the Company, during the fourth quarter of 1995, restructured its
data processing facilities by beginning migration from BIPOLAR technology to
newer CMOS technology. The Company entered into renewable lease agreements for
this technology (see Note 8). As a result of the migration, the Company
disposed of its existing central processing unit and associated equipment,
with a net book value of $18.0 million, for $4.2 million in cash, and recorded
a one-time charge on the disposition of this equipment of $13.8 million.
Concurrent with this technology upgrade, the Company upgraded certain of its
data storage equipment to a more advanced architecture. As consideration for
these storage systems upgrades, the Company exchanged existing data storage
systems, with an aggregate net book value of $6.0 million, and paid $2.0
million cash, resulting in a one-time charge of $4.6 million. These one-time
charges, aggregating $18.4 million, are recorded under Loss on disposition of
data processing equipment in the accompanying Consolidated Statement of
Operations for the year ended December 31, 1995.
Note 5. Goodwill and Other Intangible Assets
A summary of goodwill and other intangible assets is as follows:
December 31,
1995 1994
(In Thousands)
Goodwill $ 61,341 $ 65,961
Customer lists 20,503 17,984
Contract acquisition costs 15,000 5,000
Covenants not to compete 5,291 2,461
Other 6,189 1,701
108,324 93,107
Less: Accumulated amortization (19,005) (15,344)
Goodwill and other intangible assets,
net $ 89,319 $ 77,763
Goodwill and other intangible assets with an aggregate carrying value of $5.2
million were written off as part of impairment and restructuring charges
recorded during the year ended December 31, 1995 (see Note 12). Amortization
charged to expense was $9.3, $8.7 and $9.3 million for the years ended
December 31, 1995, 1994 and 1993, respectively.
<PAGE>43
Note 6. Capitalized Software Costs
A summary of capitalized software costs is as follows:
December 31,
1995 1994
(In Thousands)
Internally developed software $210,686 $154,992
Purchased software 26,265 32,305
236,951 187,297
Less: Accumulated amortization (90,969) (68,676)
Capitalized software costs, net $145,982 $118,621
Purchased software with an aggregate carrying value of $1.5 million was
written off as part of impairment and restructuring charges recorded during
the year ended December 31, 1995 (see Note 12). Amortization charged to
expense was $23.2, $19.8 and $22.4 million for the years ended December 31,
1995, 1994 and 1993, respectively.
Note 7. Long-Term Debt and Other Borrowings
Long-term debt is as follows:
December 31,
1995 1994
(In Thousands)
Credit facility borrowings (net of unamortized
deferred arrangement costs) $ 14,746 -
Notes payable, due January 1996, interest
at 8.25% 1,893 $ 8,896
16,639 8,896
Less: Current portion 1,766 4,734
Long-term debt $ 14,873 $ 4,162
On August 11, 1995, the Company entered into two unsecured credit facilities
of $100 million each with a syndicate of financial institutions to provide an
additional source of funds for general corporate purposes. The first $100
million facility bears a term of 364 days. The second $100 million facility
bears a term of 3 years. Borrowings under the facilities bear interest
payable at per annum rates based upon the Morgan Guaranty Trust Company's
Prime Rate, the Federal Funds Rate, the London Interbank Offering Rate or the
yield on certain certificates of deposit as appropriate, plus a spread above
certain of these rates ranging from .4% to .75% dependent upon certain
financial ratios of the Company. Additionally, the Company pays a per annum
facility fee on the aggregate amount of the commitments ranging from .1875%
to .375% dependent upon certain financial ratios of the Company. The Company
is subject to certain covenants including, but not limited to, the maintenance
of certain operating ratios and levels of tangible net worth. The average
interest rate applicable to borrowings under these credit facilities during
the year ended December 31, 1995 was 6.34%.
During the fourth quarter of 1994, the Company entered into an unsecured line
of credit agreement with a bank for the purpose of supporting temporary
working capital needs. The rate of interest to be charged on borrowings under
this line of credit was the 90-day London Interbank Bid Offer Rate (LIBOR)
plus one percent. As a result of the execution of the credit facilities
described above, the Company discontinued this line of credit.
<PAGE>44
Note 8. Commitments and Contingencies
Commitments
On March 27, 1995, the Company entered into a long-term license and
maintenance agreement in order to acquire rights to certain operating system
management software products for use in the Company's worldwide data center
operations. The agreement, which has an initial term of ten years, may be
renewed and extended for an additional period of five years, subject to mutual
agreement and other modifications. The March 27, 1995 agreement replaced
three five-year term agreements executed in 1993, and other related
agreements. Minimum contract payments by the Company over the initial ten
year term aggregate $33.0 million payable in specified annual installments
which escalate over the ten year period. The first annual installment due
March 31, 1995 was reduced by $1.5 million to reflect the application of a
pre-payment credit relating to a prior agreement which was terminated. In
addition to minimum contract payments, the Company will pay an annual
supplemental revenue fee (beginning 1997 for the 1996 annual period) equal to
a specified annual percentage of the Company's applicable annual gross
revenues, less the specified annual installment for such period. Minimum
contract payments will be expensed on a straight-line basis over the initial
ten year term. Annual supplemental revenue fees, if any, will be accrued in
the period in which determined.
On April 7, 1995, the Company finalized certain terms of a ten-year agreement
with an insurance holding company and its subsidiaries, initially entered into
in November 1994. The Company is to provide certain data processing and other
professional services as required. The minimum contractual processing
revenues are expected to be in excess of $60 million over the term of the
agreement. The Company incurred costs of $10 million related to this
agreement in the second quarter of 1995 ($5 million in the fourth quarter of
1994), which have been deferred as contract acquisition costs and are being
expensed on a straight-line basis over the term of the agreement. At December
31, 1995, the net unamortized amounts related to this continuing agreement,
included in other intangible assets, were $13.7 million.
During December 1995, as part of the restructuring of its data processing
facilities (see Note 4), the Company entered into 2 and 4 year renewable lease
and maintenance agreements to lease certain data processing equipment for use
in its worldwide data center operations. Minimum lease payments over the
initial term of the agreements aggregate $6.0 million payable in specified
monthly installments. At the end of the term of each agreement, the Company
has the option to purchase the leased equipment at fair market value, upgrade
the equipment with the latest technology, or discontinue each lease. The
Company has the guaranteed option to renew the two year lease for two more
years with then current technology at not-to-exceed cost.
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 $7.1,
$7.4 and $7.7 million for the years ended December 31, 1995, 1994 and 1993,
respectively. An amount of $1.8 million for lease abandonment charges is
included in Impairment and restructuring charges, net in the accompanying
Consolidated Statement of Operations for the year ended December 31, 1994.
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, net in the accompanying Consolidated Statement of Operations for the
year ended December 31, 1993 (see Note 12).
The Company leased certain data processing and related equipment primarily
under operating leases expiring through 1995. Rent expense under operating
leases for such equipment was $4.9, $5.2 and $4.3 million for the years ended
December 31, 1995, 1994 and 1993, respectively.
Future minimum lease obligations under noncancelable operating leases are
stated below and include payments over 19 years aggregating $11.3 million
related to a leasehold planned for future abandonment (see Note 12):
Facilities
Year Ending December 31, (In Thousands)
1996 $11,609
1997 6,676
1998 3,393
1999 2,277
2000 1,537
Thereafter 6,788
Total $32,280
<PAGE>45
Contingencies - Legal Proceedings
In December 1994, the Company reached an agreement, which was subsequently
approved on May 26, 1995, by the United States District Court for the District
of South Carolina, to settle its shareholder class action. The settlement of
$31 million was paid by the Company's Directors' and Officers' Liability
Insurance Carrier, the Company's former accountants and the Company. The
Company's portion of the settlement and associated litigation costs resulted
in a special one-time charge of $34.2 million ($21.3 million after tax) in the
fourth quarter of 1994. This represents the Company's portion of the total
settlement, plus the Company's litigation costs of $18.1 million ($11.2
million after tax), less the recovery from the insurance company. In March
1995, the Company and its insurance carrier signed an agreement to settle
amounts contested and the carrier agreed to pay an additional amount of $1.7
million in full settlement of the Company's claims. Accordingly, the Company
recorded a credit of $1.7 million, in the first quarter of 1995, as a further
adjustment to the estimated costs of settling the securities class action.
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 this investigation.
The Company also had been advised that the United States Attorney for the
District of South Carolina was conducting an investigation into issues raised
by the shareholder class action and SEC investigation described above. In
January of 1996, the Company received a letter from the United States Attorney
advising that the investigation had been terminated and advising that the
United States Justice Department had closed its files on this matter.
In March 1994, Security Life of Denver Insurance Company (SLD) brought suit
against the Company in the United States District Court for the District of
Colorado alleging breach of a life insurance joint development contract,
unfair trading practices and fraud. Despite the fact that the plaintiff
expressly agreed by contract to exclude from any dispute all indirect and/or
consequential damages, they now assert claims for direct, indirect,
consequential and punitive damages alleged to be in excess of $80 million.
The Company has asserted various affirmative defenses and is vigorously
pursuing a prompt resolution through all available legal processes. The
Company is also vigorously pursuing counterclaims against SLD for fraud,
breach of contract and failure to pay, unauthorized use of the Company's
software systems, misappropriation of trade secrets, unfair trade practices,
conversion of the Company's systems, unjust enrichment and fraudulent
concealment. The Company is seeking in excess of $80 million against SLD.
The Company is also seeking an injunction prohibiting SLD from continuing
unauthorized use of certain of the Company's systems and unauthorized use of
the Company's trade secrets.
In November 1993, the California State Automobile Association Inter-Insurance
Bureau and the California State Automobile Association (CSAA) brought suit
against the Company in the United States District Court for the Northern
District of California alleging breach of contract and implied covenants of
good faith and fair dealing, as well as fraud and negligent misrepresentation
concerning certain early versions of systems licensed by the Company. Despite
the fact that the plaintiffs contractually agreed to exclude from any dispute
all indirect and/or consequential damages, they now assert claims for direct,
indirect, consequential and punitive damages alleged to be in excess of $200
million. The Company has asserted various affirmative defenses and is
vigorously pursuing a prompt resolution through all available legal processes.
The Company is also vigorously pursuing counterclaims against the plaintiffs.
The Company's claims against the plaintiffs are for breach of contract,
failure to pay, and recoupment. In January of 1996, the Court considered
motions for summary judgment presented by both CSAA and the Company seeking to
dismiss the parties' respective claims. These motions were denied, however,
the Court entered an order which limited any recovery by the Company at trial
on its counterclaims to breach of contract damages and recoupment of the
discounts granted to CSAA, which damages and recoupment are approximately $6
million. The jury trial of this matter commenced on March 4, 1996, and is
expected to conclude in late April or early May 1996.
Also in January of 1996, the Company and Liberty Life Insurance Company each
filed a complaint against the other arising from a previously disclosed
contract dispute from the parties' prior contractual relationship related to
the development and licensing of Series III life insurance systems and the
subsequent licensing of the Company's Cybertek life insurance systems. The
Company's complaint against the defendants (Liberty Life Insurance Company,
the Liberty Corporation, and Liberty Insurance Services) was filed in Richland
County, South Carolina, alleging breach of contract, recoupment, breach of
good faith and fair dealing, breach of contract accompanied by a fraudulent
act. The Company is seeking equitable relief, including preliminary and
permanent injunctions, and currently an unspecified amount for actual,
compensatory, and consequential damages. The Liberty Life Insurance Company's
complaint against the Company was filed in Greenville County, South Carolina,
alleging breach of contract, breach of express and implied warranties,
fraudulent inducement, breach of contract accompanied by a fraudulent act, and
recision. Liberty Life Insurance Company has alleged actual and consequential
damages of approximately $30 million and also seeks treble and punitive
damages. The Company has asserted various affirmative defenses and is
vigorously pursuing a prompt resolution through all available legal processes.
<PAGE>46
The Company was informed by its insurer, St. Paul Mercury Insurance Company
(St. Paul), that based upon the allegations raised in the SLD and CSAA
lawsuits, St. Paul does not believe it would be obligated under the Company's
insurance policies to reimburse defense costs or indemnify the Company for any
payments relating to these claims. The Company disagrees with this conclusion
and on June 20, 1995 the Company's insurer commenced a declaratory judgment
action to determine the insurer's obligations related to defense costs and
indemnity related to these two lawsuits. As a result of this action, the
Company has filed a counterclaim against St. Paul alleging St. Paul's breach
of two (2) insurance policies issued to the Company by St. Paul and breach of
good faith and fair dealing by St. Paul. The Company seeks to recover the
Company's defense costs in the CSAA and SLD matters, coverages for damages, if
any, awarded in those matters, and consequential and punitive damages.
As a result of the action of St. Paul described above, the Company determined
it was probable the Company would incur litigation expenses arising in the
CSAA and SLD matters through their anticipated conclusion during 1995 of $7.9
million and provided for these expenses at June 30, 1995. The costs provided
for include, but are not limited to, legal fees paid or anticipated to be paid
and other costs related to the Company's claims and defenses for these
matters. The Company re-evaluated its estimate of anticipated liability for
expenses to be incurred in the proceedings described above due to the
continuance of the CSAA and SLD trial dates into 1996, the SEC investigation
continuing into 1996, and the litigation with St. Paul and Liberty. As a
result of this re-evaluation, the Company determined it was necessary to
increase its estimate of anticipated liability for the costs associated with
these matters and at December 31, 1995, provided an additional $12.3 million
for the estimated future litigation expenses arising from these matters during
1996. Changes in the status of certain matters or facts or circumstances
underlying these estimates could result in material changes to these
estimates, and actual results could differ from these estimates.
In addition to the litigation described above, 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 any of the above matters could have a material adverse
effect on 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. The Company, however, is unable to predict the ultimate
outcome or the potential financial impact of these matters.
<PAGE>47
Note 9. 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,
1995 1994 1993
Provision for taxes at the
statutory rate 35.0% (35.0)% (35.0)%
Increase (decrease) in provision from:
Goodwill (31.4) 25.1 22.9
Internal Revenue Service settlement - (32.5) -
Revaluation of deferred state
income tax liability (4.0) (5.4) -
Purchased research and development 62.7 4.8 -
Nontaxable investment income (1.8) (6.7) (3.6)
State and local income taxes,
net of federal tax effect 3.0 (0.2) (1.4)
Differences in foreign and US tax rate (23.2) 0.3 -
Deferred tax asset valuation allowance 14.8 - -
Increase in statutory rate - - 1.6
Other 6.0 1.8 -
26.1% (12.8)% 19.5%
Effective income tax
provision (benefit) rate 61.1% (47.8)% (15.5)%
An analysis of the income tax provision (benefit) is as follows:
Year ended December 31,
1995 1994 1993
(In Thousands)
Current taxes $ 1,451 $ (5,607) $ (7,266)
Deferred income taxes relating to
temporary differences:
Depreciation and amortization
of property, equipment and
intangibles (1,748) (7,808) 3,834
Capitalized software
development costs 8,876 6,555 4,914
Impairment and restructuring of
operations 1,312 2,145 (12,855)
Internal Revenue Service
settlement - (6,000) -
Revaluation of deferred state
income tax liability (497) (999) -
Accrued litigation settlement
and expense (3,445) (1,489) -
Other (1,007) 4,372 1,110
3,491 (3,224) (2,997)
Total income tax
provision (benefit) $ 4,942 $ (8,831) $(10,263)
<PAGE>48
An analysis of the net deferred income tax liability is as follows:
December 31,
1995 1994
(In Thousands)
Current deferred assets:
Net operating loss carryforward $11,824 $ 411
Accrued legal fees 4,915 1,476
Foreign tax credit carryforward 2,437 -
Other 5,968 4,757
Current deferred assets 25,144 6,644
Long-term deferred assets:
Impairment and restructuring of operations 4,520 5,743
State tax credits 4,801 4,945
Other 3,472 1,765
Long term deferred assets 12,793 12,453
Total deferred assets $37,937 $19,097
Current deferred liabilities:
Other $ 691 $ 613
Current deferred liabilities 691 613
Long-term deferred liabilities:
Depreciation and amortization of property,
equipment and intangibles 16,217 13,743
Capitalized software development costs 47,321 38,625
Other 3,391 2,303
Long-term deferred liabilities 66,929 54,671
Total deferred liabilities $67,620 $55,284
The Company generated a $26.9 million net operating loss for the year ended
December 31, 1995 for tax purposes. This loss, which is anticipated to be
carried forward, will expire in 2010. Additionally, the Company has loss
carryforwards from acquired companies of approximately $.7 million at December
31, 1995. The acquired loss carryforwards are subject to an annual limitation
and will expire in 2002. Certain foreign subsidiaries of the Company have net
operating loss carryforwards at December 31, 1995 totaling approximately $7.0
million, which may be used to offset future taxable income. The carryforwards
have no expiration period.
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% to 35%. 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.
The Company's U.S. income tax returns for the years 1985 through 1990 have
been examined by the Internal Revenue Service (IRS). The Company reached a
final settlement with the IRS related to all issues in the 1985 through 1990
examinations. As a result of this settlement, the Company paid $3.9 million
and reduced its provision for income taxes for the year ended December 31,
1994 by $6.0 million for taxes provided in prior periods. The IRS is
conducting its normal examination of the Company's consolidated federal income
tax returns for the years 1991 through 1993. The Company believes that
adequate amounts of federal income tax have been provided for in its
consolidated financial statements for these years.
No provision has been made for federal income taxes on unremitted earnings of
certain of the Company's foreign subsidiaries (approximately $7.3 million at
December 31, 1995) since the Company plans to permanently reinvest all such
earnings. However, if such earnings were remitted, foreign tax credits would
be available to substantially offset the resulting U.S. income tax.
The Company has foreign tax credit carryforwards at December 31, 1995 of $2.4
million which will expire on December 31, 2000. The Company recorded a
valuation allowance of $3.1 million at December 31, 1995 related to certain
deferred tax assets that are not anticipated to be utilized.
<PAGE>49
Note 10. Employee Benefit Plans
Profit Sharing Plan and Trust
Prior to July 1, 1995, eligible employees were covered under the Policy
Management Systems Corporation Profit Sharing Plan and Trust. The Company's
contributions to this Plan were determined by the Board of Directors of the
Company. Employees made no contributions to this Plan. The Company made no
contributions to the Plan for 1995, 1994 and 1993 and on July 1, 1995, all
accounts of all Participants in this Plan were merged into the Company's
401(k) Retirement Savings Plan.
401(k) Retirement Savings Plan
The Company offers the Policy Management Systems Corporation 401(k) Retirement
Savings Plan to eligible employees. Prior to January 1, 1995, Participants
could elect to contribute up to 10% of their salary to the Plan, on either a
before-tax basis, an after-tax basis, or a combination of both. The Company
made a matching contribution of 50% for the first 6% of salary contributed by
the Participant. Beginning January 1, 1995, the Company made a matching
contribution of 100% of the first 3% of salary contributed by the Participant
and a matching contribution of 50% of the next 3% of salary contributed by the
Participant. Subject to limits imposed by the Internal Revenue Service, the
Internal Revenue Code and the Plan, Participants may also make additional
before-tax and after-tax contributions that are not subject to matching
contributions by the Company. Participants have several options as to how
their contributions and vested Company contributions are invested. Until
October 31, 1993, all non-vested and current Plan year Company contributions
were invested in common stock of the Company. Non-vested and current Plan
year Company contributions for the period November 1, 1993 through June 30,
1995 were invested in a government money market fund. Beginning July 1, 1995,
non-vested and current Plan year Company contributions were again invested in
common stock of the Company. The Company's contribution on behalf of
participating employees was $3.5, $2.2 and $1.9 million for the years ended
December 31, 1995, 1994 and 1993, respectively.
Stock Ownership Plan
In May 1995, the Company established a stock ownership plan through which
eligible employees of the Company and its participating affiliates may acquire
shares of the Company's common stock through regular payroll deductions.
Participants may make after-tax contributions in multiples of $5.00, with a
minimum deduction per pay period of $10.00 and a maximum deduction per pay
period of the lesser of $900.00 or 10% of regular salary. The Company makes a
matching contribution equal to 15% of Participant contributions. Participants
who withdraw shares acquired under the Plan within two years of the date of
purchase are ineligible to make further contributions to purchase shares under
the Plan for twelve months after such withdrawal.
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 January 1993, options were granted
under the Company's 1993 Long-Term Incentive Plan for Executives, subject to
approval by the Company's stockholders. At the annual meeting of the Company's
stockholders in April 1993, amendments increasing the number of shares
available for grant under the 1989 Stock Option Plan and the 1993 Long-Term
Incentive Plan for Executives were approved.
In January and February 1994, options were granted under the 1993 Long-Term
Incentive Plan for Executives to two new executive officers, according to the
formula in the plan. In May 1994, options were granted under the 1989 Stock
Option Plan to eligible employees. In October 1994, additional options were
granted under the 1989 Stock Option Plan to the Directors and to certain
senior executives, a portion of which were subject to approval by the
Company's stockholders of an amendment to increase the number of shares
reserved for issuance under that plan. In November 1994, options were granted
to a new Director under the 1989 Stock Option Plan, subject to approval by the
Company's stockholders of the aforementioned amendment. At the annual meeting
in May 1995, the amendment was approved. Pursuant to the formula regarding
promotions of participating officers, as set forth in the 1993 Long-Term
Incentive Plan for Executives, options were granted under this plan to certain
individuals who were promoted since participating in the plan.
In January, July and October 1995, options were granted under the 1993 Long-
Term Incentive Plan for Executives to five officers, promoted during 1995,
according to the formula in the plan. In May and November 1995, options were
granted under the 1989 Stock Option Plan to eligible employees. In July 1995,
additional options were granted under the 1989 Stock Option Plan to certain
senior executives.
<PAGE>50
Option activity under all of the stock option plans is summarized as follows:
Year Ended December 31,
1995 1994 1993
Shares under option at beginning
of year 2,804,328 1,725,119 1,202,856
Granted 674,359 1,361,143 592,500
Exercised (73,130) - (21,777)
Forfeited (299,393) (281,934) (48,460)
Shares under option at
end of year 3,106,164 2,804,328 1,725,119
Shares under option exercisable
at end of year 1,119,562 878,165 766,805
Shares available for
future grant 1,995,162 174,653 1,175,916
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,
1995, 1994 and 1993, were $15.13 to $49.63. The exercise prices of shares
under option at December 31, 1995, 1994 and 1993, other than under the 1993
Long-Term Incentive Plan for Executives, were $15.13 to $69.38.
All options granted under plans, other than those granted under the 1993
Long-Term Incentive Plan for Executives, have exercise prices at 100% of
market value at date of grant and, other than those granted in October 1994
and after, are exercisable at the rate of 33 1/3% per year (cumulative)
beginning one year from date of grant. The options granted in May, July and
November 1995 are exercisable at the rate of 20% per year (cumulative),
beginning one year from date of grant. The options granted in October 1994 to
the senior executives are exercisable at the rate of 33 1/3% per year
(cumulative) beginning three years from the date of grant.
Options granted in 1993 under the 1993 Long-Term Incentive Plan for Executives
have exercise rights at 105% of market value at the date of grant. All of
these options have an exercise price of $81.90. (For individuals who were or
may be selected later to participate in the 1993 Long-Term Incentive Plan for
Executives or for additional options which were granted or may be granted to
participants due to promotions, said percentage is based on the year the
individual was or may be selected or promoted 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 were selected or may be selected to participate in the plan and for
additional options which were granted or may be granted to participants due to
promotions, the number of options granted and what percentage becomes
exercisable on the above dates are determined according to formulas described
in the plan.
Note 11. Certain Transactions
On June 30, 1995, the Company sold its Health Insurance Systems Division for a
total consideration of $9.3 million in cash. After selling expenses of $.5
million, the net book value of assets sold of $.5 million, liabilities
resulting from the sale, including severance liabilities for certain employees
and other reserves of $1.5 million, and the present value of a sublease
executed by the purchaser for certain office space of $1.3 million, the
Company recorded a pre-tax gain of $8.1 million, which has been recorded under
"Costs and Expenses" in the Consolidated Statements of Operations for the year
ended December 31, 1995.
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 $56.6 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 December 31,
1994, the Company had repurchased, on the open market, 995,500 shares of its
common stock for a total of $35.3 million. There were no shares repurchased
during the twelve months ended December 31, 1995.
<PAGE>51
Note 12. Impairment and Restructuring Charges
The Company, as a result of significant changes in the property and casualty
insurance industry, experienced a $5.1 million operating loss (before interest
and income taxes) in its property and casualty domestic automobile and risk
information services business in 1994 ($.8 million for automobile and $4.3
million for risk) on revenues of $128.9 million ($102.5 million for automobile
and $26.4 million for risk). Although the Company took actions during 1994 to
improve the overall performance of these businesses, such as implementing
management changes, realignment and consolidation of field offices, and
refining and enhancing current product offerings, these businesses continued
to reflect declining sales and earnings, with the loss of key customers. The
Company determined that there was a trend towards reduced sales and acceptance
of new business in the industry as a result of multiple years of major
catastrophic losses affecting this industry. The Company believes that this
industry reacted to these catastrophic losses by focusing on risk
concentration and in many cases making deliberate decisions to discontinue
writing business in certain high risk areas, and some insurers ceased doing
business or withdrew from certain states. Although the Company consolidated
its branch network offices to lower its fixed costs, this did not offset the
increasing variable costs incurred due to the geographic dispersion of the
Company's customer base. As competition increased, leading to intense price
competition among information providers, the Company's competitors, through
package pricing, were offering certain competing products to the market below
the Company's cost. The Company believed that the combination of factors would
result in a continued decline in demand for certain information services.
As a result of a detailed business assessment, revised forecasts of discounted
expected future cash flows and the application of the Company's accounting
policy to evaluate recoverability, the Company determined that the carrying
value of certain intangible assets of these businesses was not fully
recoverable. The Company recorded, at October 1, 1994, impairment charges of
$19.1 million to write-off the carrying value of certain identifiable
intangible assets ($6.4 million) and goodwill ($12.7 million) related to its
property and casualty automobile and risk information services businesses.
During November, 1995, the Company entered into an alliance with a leading
database information enterprise to provide this enterprise with motor vehicle
reports and receive access to a database containing approximately 80% of the
available automotive claims history information in the United States. This
agreement is expected to contribute to the long-term improvement of the
automobile information services business, although the combination of the
above existing factors may result in continued near-term losses. For the year
ended December 31, 1995, the automobile information services business reported
a loss of $1.1 million on revenues of $87.6 million.
During 1995, the Company continued to examine its options to improve the
overall performance of the risk information services business. Options
considered by the Company regarding this business included price increases,
outsourcing arrangements with other providers, automation of its field force
and a continued consolidation of field offices. The price increases and the
consolidation of its field offices, implemented during the first and second
quarters of 1995, did reduce the Company's operating losses by the third
quarter of 1995, but not significantly. Additionally, the Company was not
successful in its efforts to outsource the business, because major vendors in
the market provided database information to insurance companies and were not
interested in performing data collection services. The Company determined
automating the field force was not economically justified. The risk
information services business continued to reflect declining sales and
earnings, reporting revenues of $22.7 million for the year ended December 31,
1995 and an operating loss of $4.2 million.
The Company, as a result of its continued detailed business assessment,
determined that there were no further services or investment alternatives that
could bring these operations to profitability and that the cash losses related
to the risk information services business would continue into the future. As a
result, the Company decided to restructure its property and casualty
information services business and cease providing certain data collection
services, including property inspections, commercial audits and pre-employment
checks. The Company decided to sell the pre-employment business and completely
cease and abandon operations in property inspections and commercial audits. As
a result, the Company recorded, at December 31, 1995, restructuring charges of
$3.7 million for disposal and severance charges related to exiting these
operations.
As a result of less than expected financial results for 1994 relating to the
Company's on-site medical correspondence information services business,
acquired in February 1993, the Company attempted to improve the results of the
business by closing unprofitable offices and modifying the volume and type of
services offered. These modifications resulted in an increase in staffing
requirements and equipment expense, however, the anticipated increase in
revenues did not occur, and the 1995 financial results of the business fell
short of expectations. The Company performed a detailed assessment of the
business and, expects a continuing decline in revenues and cash flows.
Additionally, the Company expects that the state of Georgia will pass
legislation in 1996 which would reduce the fees that could be charged for such
services. Based on these, as well as other factors, the Company determined
that the expected future cash flows of this business did not support the
carrying value of the related goodwill and identifiable intangible assets. As
a result, at October 1, 1995, the Company recorded impairment charges of $1.8
million to write-off the carrying value of the identifiable intangible assets
($1.1 million) and goodwill ($.7 million).
<PAGE>52
As part of a 1983 business acquisition, the Company acquired a billing and
collection system (CABILS), which was originally utilized in specialty
processing or the processing of assigned risk business for the Company's
customers (principally those customers acquired in the business acquisition)
and, later, evolved into the basis for a portion of the Company's full
property and casualty total policy management processing for voluntary as well
as assigned risk business. During 1995, several of the Company's customers of
this business opted to either move some or all states served by them to LAD
servicing carriers or to not renew their agreements for these services for
other reasons. In addition, the Texas Plan implemented rate increases and a
mandatory takeout plan which had the effect of further decreasing the number
of policies served by the Company. During 1995, the Company decided to migrate
its property and casualty total policy management processing to its Series III
technology, replacing the software acquired in 1983. Based on a detailed
business assessment performed by the Company, the anticipated discounted cash
flows for this business for the period until the Series III migration is
completed do not support the carrying value of the software and related
goodwill associated with this business. As a result, the Company recorded, at
October 1, 1995, impairment charges of $2.8 million to write-off the carrying
value of the software ($.4 million) and related goodwill ($2.4 million).
During 1995, the Company ceased the active marketing of certain processing
software utilized in the processing of Individual Accident and Health business
by the Company's life business. Revenue growth for this product, if any, is
expected to come from existing clients adding policy volume through
traditional new business sales or by the acquisition of new, multi-policy
blocks of business, however, the existing customer base is expected to
ultimately decrease as processing contracts expire. A discounted cash flow
valuation performed by the Company under the above assumptions indicated that
the expected discounted future cash flows of this business do not entirely
support the carrying value of the goodwill associated with this business,
which was originally acquired in 1987. As a result, the Company recorded at
December 31, 1995 impairment charges of $.9 million to write-down the carrying
value of the related goodwill to its estimated net realizable value.
The Company has applied its methodology for measuring impairment (see Note 1)
by discounting expected future cash flows. In determining its forecasted
future results, the Company considered historical financial performance,
current and prospective insurance industry environment and market conditions
and the long-term opportunities for future growth in the respective
businesses. The Company believes that its forecasted future results based on
current market conditions and recent historical trends, is the best estimate
of the Company's discounted future cash flows.
Expected future cash flows for these businesses are based on the current level
of operating income or loss continuing in the near-term with only a modest
recovery over the long-term principally because the Company expects the
negative impact of the insurance industry market environment to continue into
the future. Consequently, at the end of the forecast period, a residual was
included based on an estimate of liquidation value. The Company used discount
rates of 10-18%, which include factors for equity commensurate with the risk
associated with the various businesses. These rates were determined using the
Capital Asset Pricing Model which reflects the return the Company should
achieve on its investment.
The Company determined that a development and design tool used in the
development of certain of its property and casualty software no longer
provided significant service potential to the Company's development efforts.
As the Company's license for the tool is non-transferable, the Company
recorded an impairment charge at October 1, 1995 of $1.1 million to write-off
the remaining carrying value of this software.
The acquisition of CYBERTEK provided the Company with the opportunity to
develop new releases of certain of its life software systems based on the
business functions of CYBERTEK software, and to assess strategic changes in
direction related to the Company's development of its future life software
systems. As a result, the Company determined in the fourth quarter of 1994
that certain business operations and software systems acquired from Genesis,
of Krumpendorf, Austria would not be compatible with the Company's future
direction. The Company decided that it would cease operations related to this
business and would no longer market or license Aussen-und Innendienst
Workstation, the software system acquired from Genesis. Consequently, the
Company recorded impairment charges to write-off the carrying value of certain
identifiable intangible assets and goodwill of $.7 million and acquired
software of $1.5 million related to this prior business acquisition.
The Company decided that in the fourth quarter of 1994 it would cease to do
business in certain markets with respect to the CAPSIL business and operations
acquired from Capsco Pallm Systems, Inc. The Company determined that the
functionality and technical platform represented by acquired software for the
domestic market would be replaced by software that has been and or is being
developed in conjunction with its future strategic direction. The acquired
software, however, is being marketed and licensed in Southeast Asia and, based
on a detail analysis of recoverability, the Company determined that no
write-down of the software was necessary. The Company did, however, record
impairment charges of $1.8 million to reduce the carrying value of certain
identifiable intangible assets ($.7 million) and goodwill ($1.1 million)
relating to the acquired business in the United States.
Due to a decision by one of the Company's property and casualty insurance
customers not to license software acquired by the Company for integration into
its property and casualty software systems and the Company's decision not to
market or license such software, the Company recorded impairment charges of
$1.9 million in the fourth quarter of 1994 to write-off the carrying value of
such software.
<PAGE>53
During the fourth quarter of 1994, the Company also decided it would no longer
market or license its Agency Workstation System (AWS), an automated insurance
agency sales and marketing software system, acquired from Agency Automation
Partners Limited. As more of the Company's customers have become operational
on Series III and plan the full implementation of Series III functions, the
Company changed its strategy for integrated system solutions between the
insurance company and its agents (or independent agents) or direct marketers.
As a result, the Company changed its dependency on AWS and integrated new
agency software system tools with its Series III functions. Consequently, the
Company recorded impairment charges of $8.1 million to write-off the carrying
value of AWS.
Impairment and restructuring charges in 1993 totaling $80.7 million resulted
primarily from impairment charges to reduce the carrying value of certain
identifiable intangible assets and goodwill related to the Company's 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). These
charges were recorded at June 30, 1993, after 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. As a part of these non-cash impairment charges, acquired software
of $9.2 million was written-off. Non-cash impairment charges included certain
other identifiable intangibles of $6.3 million and goodwill of $39.4 million.
The Company also recorded other restructuring charges of $.6 million.
During 1994, the Company, as a result of new events occurring, changed its
estimates and reduced its restructuring reserves associated with its health
insurance systems business, established in June 1993, by $4.4 million, $2.6
million of which resulted from a change in the scheduled downsizing of the
Company's health staff and a corresponding reduction in amounts established
for severance and outplacement costs and $1.8 million of which resulted from a
lease termination at amounts less than those established for the planned
future abandonment of certain leased office facilities.
Since June 30, 1993, the Company continued to downsize its health staff from
437 to 220 at the end of 1994. Compensation and other benefits decreased $7.8
million for 1994 as a result of downsizing from 388 at the end of 1993. The
Company's downsizing of this business continued into 1995, when its health
insurance systems business was sold on June 30, 1995 (see Note 11).
Note 13. Segment Information
The Company operates in one business segment, providing insurance software
systems and providing automation and administrative support and information
services to the worldwide insurance industry. Less than ten percent of the
Company's revenues from unaffiliated customers are generated from exports, and
no one customer accounted for more than ten percent of total consolidated
revenues during the year ended December 31, 1995.
The Company operates in several geographical areas worldwide. A summary of
the Company's operations by area follows:
Year Ended December 31,
1995 1994
(In Thousands)
Net revenues:
United States $453,530 $445,462
International 113,867 65,049
Eliminations (30,095) (17,805)
Total net revenues $537,302 $492,706
Income (loss) before income taxes (benefit):
United States $ 3,333 $(15,189)
International 3,087 (2,026)
Eliminations 1,661 (1,274)
Total income (loss) before
income taxes (benefit) $ 8,081 $(18,489)
Identifiable assets:
United States $516,602 $491,768
International 120,081 59,935
Eliminations (59,609) (27,672)
Total identifiable assets $577,074 $524,031
<PAGE>54
Note 14. Significant Risks and Uncertainties
The Company's operating results and financial condition can be impacted by a
number of factors, including but not limited to the following, any of which
could cause actual results to vary materially from current and historical
results or the Company's anticipated future results.
Currently, the Company's business is focused principally within the global
property and casualty and life insurance industries. Significant changes in
the regulatory or market environment of these industries could impact demand
for the Company's software products and services. Additionally, there is
increasing competition for the Company's products and services, and there can
be no assurance that the Company's current products and services will remain
competitive, or that the Company's development efforts will produce products
with the cost and performance characteristics necessary to remain competitive.
Furthermore, the market for the Company's products and services is
characterized by rapid changes in technology. The Company's success will
depend on the level of market acceptance of the Company's products,
technologies and enhancements, and its ability to introduce such products,
technologies and enhancements to the market on a timely and cost effective
basis, and maintain a labor force sufficiently skilled to compete in the
current environment.
Contracts with governmental agencies involve a variety of special risks,
including the risk of early termination by the governmental agency and changes
associated with newly elected state administrations or newly appointed
regulators.
The timing and amount of the Company's revenues are subject to a number of
factors, including, but not limited to, the timing of customers' decisions to
enter into large license agreements with the Company, which make estimation of
operating results prior to the end of a quarter or year extremely uncertain.
Additionally, while management believes that the Company's financing needs for
the foreseeable future will be satisfied from cash flows from operations and
the Company's currently existing credit facilities, unforeseen events or
adverse economic or business trends may significantly increase cash demands
beyond those currently anticipated or affect the Company's ability to
generate/raise cash to satisfy financing needs.
As discussed in Note 1, the preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Amounts affected by these estimates
include, but are not limited to, the estimated useful lives, related
amortization expense and carrying values of the Company's intangible assets
and capitalized software development costs and reserves established for
contingencies such as litigation and restructuring activities. Changes in the
status of certain matters or facts or circumstances underlying these estimates
could result in material changes to these estimates, and actual results could
differ from these estimates.
As a result of the above and other factors, the Company's earnings and
financial condition can vary significantly from quarter-to-quarter and
year-to-year. These variations may contribute to volatility in the market for
the Company's common stock.
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, 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 is
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 uncollectible accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.
Note 15. Subsequent Event
The Company announced on March 14, 1996, that it had agreed with GAP
Coinvestment Partners and General Atlantic Partners 14 L.P. (collectively
"General Atlantic Investors") to repurchase 759,512 of the 1,519,024 shares
of the Company's common stock held by General Atlantic Investors and that
the remainder of the Company's shares owned by General Atlantic Investors
would be purchased by Continental Casualty Company, one of the nation's
largest insurance companies and a licensee of the Company's Series III
Solutions. The repurchase by the Company will be at $50.00 per share,
which approximates an aggregate cash expenditure of $38.0 million. The
shares to be repurchased by the Company represent 3.9% of its total shares
outstanding prior to the repurchase. The Company expects to complete this
transaction during the second quarter of 1996.
<PAGE>55
<TABLE>
Policy Management Systems Corporation
Quarterly Consolidated Results of Operations
<CAPTION>
(Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In Thousands, Except Per Share Data)
1995
<S> <C> <C> <C> <C>
Revenues $133,419 $133,503 $131,222 $139,158
Operating income (loss) 18,388 17,013 17,118 (43,895)
Other income and expenses, net (268) (292) (4) 21
Income (loss) before income
taxes (benefit) 18,120 16,721 17,114 (43,874)
Net income (loss) $ 11,320 $ 12,090 $ 11,594 $(31,865)
Net income (loss) per share $ .58 $ .62 $ .60 $ (1.64)
1994
Revenues $115,942 $124,741 $126,993 $125,030
Operating income (loss) 7,817 13,670 14,626 (55,858)
Other income and expenses, net 911 223 (333) 455
Income (loss) before income
taxes (benefit) 8,728 13,893 14,293 (55,403)
Net income (loss) $ 5,568 $ 8,598 $ 9,723 $(33,547)
Net income (loss) per share $ .25 $ .40 $ .49 $ (1.73)
1993
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
<FN>
The results of operations in 1995 reflect special charges recorded in the
fourth quarter of $58.6 million (after taxes $42.9 million, or $2.21 per
share). Additionally, the Company recorded credits of $1.7 million (after
taxes $1.0 million, or $.05 per share) and charges of $7.9 million (after
taxes $4.9 million or $.25 per share), for the three months ended March 31,
and June 30, 1995, respectively. On June 30, 1995, the Company sold its Health
Insurance Systems Division, and recorded a pre-tax gain of $8.1 million (after
taxes $6.7 million, or $.35 per share).
The results of operations in 1994 reflect special charges recorded in the
fourth quarter of $71.9 million (after taxes $44.2 million, or $ 2.27 per
share). As a result of the Internal Revenue Service settlement, the Company's
1994 provision for income taxes reflected a $6.0 million reduction of taxes
provided in prior periods (see Note 9 of Notes to the Consolidated Financial
Statements).
The results of operations for 1993 reflect special charges of $98.8 million
(after taxes, $76.2 million, or $3.29 per share). Special charges recorded
for the three months ended June 30, 1993 reflect impairment and restructuring
charges related to certain identifiable intangible assets and acquired
software of the Company's health insurance systems business of $80.7 million
(after taxes $65.0 million, or $2.87 per share). Additionally, the Company
recorded charges of $.5 million (after taxes $.3 million, or $.01 per share)
and $17.6 million (after taxes $10.9 million, or $.48 per share), for the
three months ended March 31, and June 30, 1993, respectively.
For a further discussion of these special charges/credits see Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Note 12 of Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>56
<TABLE>
SCHEDULE II
Policy Management Systems Corporation
Valuation and Qualifying Accounts
<CAPTION>
Additions
Balance Charged
at Charged to Balance
Beginning to Other at End
Description of Period Expenses Accounts Deductions of Period
(In Thousands)
<S> <C> <C> <C> <C> <C>
Allowance for uncollectible
amounts
Year ended December 31, 1995 $ 1,024 1,201 - (183)(2) $ 2,042
Allowance for uncollectible
amounts
Year ended December 31, 1994 $ 1,817 955 59(1) (1,807)(2) $ 1,024
Allowance for uncollectible
amounts
Year ended December 31, 1993 $ 1,630 1,768 601(1) (2,182)(2) $ 1,817
Accrued restructuring and
lease termination costs
Year ended December 31, 1995 $16,444 3,850(3) - (6,399)(4) $13,895
Accrued restructuring and
lease termination costs
Year ended December 31, 1994 $29,256 73(3) - (12,885)(4) $16,444
Accrued restructuring and
lease termination costs
Year ended December 31, 1993 $ - 29,696(3) - (440)(4) $29,256
<FN>
Notes:
(1) Amounts acquired through business acquisitions and/or recovery of
amounts previously written off.
(2) Write-off of amounts uncollectible.
(3) Principally relates to amounts estimated for employee severance and
outplacement and to ongoing lease obligations and/or terminations for
the planned future abandonment of certain leased office facilities,
including credit amounts for changes in these estimates.
(4) Principally cash payments related to lease terminations and employee
severance and outplacement costs.
</TABLE>
<PAGE>57
Policy Management Systems Corporation
Report of Independent Accountants
To the Board of Directors
Policy Management Systems Corporation
Our report on the consolidated financial statements of Policy Management
Systems Corporation and subsidiaries, is included on page 30 of this Form
10-K. In connection with our audits of such financial statements, we have
also audited the related financial statement schedule listed in the index
on page 29 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand
Atlanta, Georgia
February 12, 1996
<PAGE>58
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
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 1996 Proxy Statement and is
incorporated herein by reference.
Item 11. Executive Compensation
The section of the Company's 1996 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 1996 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 1996 Proxy Statement titled "Certain
Transactions" is incorporated herein by reference.
<PAGE>59
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
29.
Exhibits Filed
Exhibits required to be filed with this Annual Report on Form 10-K are listed
in the following Exhibit Index. Certain of such exhibits which have heretofore
been filed with the Securities and Exchange Commission and which are
designated by reference to their exhibit numbers in prior filings are hereby
incorporated herein by reference and made a part thereof.
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, 1995 is incorporated herein by reference.
Form 8-K
The Company did not file any reports on Form 8-K during the last quarter of
the year ended December 31, 1995.
<PAGE>60
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
DATE March 29, 1996 Timothy V. Williams, Executive Vice
President and Chief Financial Officer
BY (SIGNATURE) /s/ Stan F. Stoudenmire
DATE March 29, 1996 Stan F. Stoudenmire, Vice President
and Corporate Controller
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
DATE March 29, 1996 Directors, President and Chief Executive
Officer
BY (SIGNATURE) /s/ Roy L. Faulks
(NAME AND TITLE) Roy L. Faulks, Vice Chairman of the
DATE March 29, 1996 Board of Directors
BY (SIGNATURE) /s/ John P. Seibels
(NAME AND TITLE) John P. Seibels, Director
DATE March 29, 1996
BY (SIGNATURE) /s/ Frederick B. Karl
(NAME AND TITLE) Frederick B. Karl, Director
DATE March 29, 1996
BY (SIGNATURE) /s/ Richard G. Trub
(NAME AND TITLE) Richard G. Trub, Director
DATE March 29, 1996
BY (SIGNATURE) /s/ Joseph D. Sargent
(NAME AND TITLE) Joseph D. Sargent, Director
DATE March 29, 1996
BY (SIGNATURE) /s/ Dr. John M. Palms
(NAME AND TITLE) Dr. John M. Palms, Director
DATE March 29, 1996
BY (SIGNATURE) /s/ Joe M. Henson
(NAME AND TITLE) Joe M. Henson, Director
DATE March 29, 1996
BY (SIGNATURE) /s/ Steven A. Denning
(NAME AND TITLE) Steven A. Denning, Director
DATE March 29, 1996
<PAGE>61
Policy Management Systems Corporation
Exhibit Index
Exhibit Number
10. MATERIAL CONTRACTS
A. Stock Option/Non-Compete Form Agreement for named executive
officers together with schedule identifying particulars for each named
executive officer (Filed herewith)
B. Stock Option/Non-Compete Form Agreement for named executive
officers together with schedule identifying particulars for each named
executive officer (Filed herewith)
C. Stock Option/Non-Compete Agreement Amendment No. 1 dated November
8, 1995 to Stock Option/Non-Compete Agreement dated July 20, 1995 with Paul R.
Butare (Filed herewith)
D. Stock Option/Non-Compete Agreement with Timothy V. Williams dated
February 1, 1994 (Filed herewith)
E. Stock Option/Non-Compete Agreement with Timothy V. Williams dated
May 10, 1995 (Filed herewith)
11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(Filed herewith)
21. SUBSIDIARIES OF THE REGISTRANT
(Filed herewith)
23. CONSENTS OF EXPERTS AND COUNSEL
Consent of Coopers & Lybrand (Filed herewith)
<PAGE>1
EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT
THIS EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT ("the Agreement") is made
effective as of by and between
("EMPLOYEE") and Policy Management Systems Corporation ("PMSC").
W I T N E S S E T H:
WHEREAS, EMPLOYEE has been employed by PMSC in a position of significant
responsibility and PMSC desires to recognize EMPLOYEE'S contribution to PMSC by
making EMPLOYEE a "Key Employee" as defined in the Policy Management Systems
Corporation 1989 Stock Option Plan ("Plan") and therefore eligible to be granted
Options as defined therein; and
WHEREAS, EMPLOYEE has developed and will continue to develop intimate knowledge
of PMSC's business practices, which, if exploited by EMPLOYEE in contravention
of this Agreement, could seriously, adversely and irreparably affect the
business of PMSC; and
WHEREAS, EMPLOYEE and PMSC each desire to induce the other to enter into this
Agreement; and
WHEREAS, PMSC would not make EMPLOYEE a Key Employee in the event that EMPLOYEE
refused to agree to the terms and conditions of this Agreement and thus EMPLOYEE
would not be eligible to receive Options under the Plan;
NOW, THEREFORE, in consideration of the premises and the mutual promises and
covenants of the parties hereto, EMPLOYEE and PMSC agree as follows:
1. Grant. Effective PMSC grants EMPLOYEE "non-qualified"
Options to purchase up to shares of PMSC common stock pursuant
to the Plan. Non-qualified options are subject to tax upon exercise as set
forth in paragraph 5 below.
THESE OPTIONS MAY BE REVOKED BY THE COMPENSATION COMMITTEE OF THE BOARD OF
DIRECTORS IN THEIR ABSOLUTE DISCRETION, PRIOR TO THE TIME THEY BECOME
EXERCISABLE IN ACCORDANCE WITH SECTION 9 OF THE PLAN IF THEY DEEM IT
APPROPRIATE TO DO SO BASED UPON SUCH FACTS OR CIRCUMSTANCES AS THEY DEEM
RELEVANT, INCLUDING, WITHOUT LIMITATION, THE RESULTS OR FINDINGS, WHETHER
PRELIMINARY OR FINAL, OF THE VARIOUS INVESTIGATIONS INTO THE COMPANY'S
PREVIOUSLY ISSUED FINANCIAL STATEMENTS.
2. Price and Expiration. The option price of the shares subject to these
Options is the closing price of the stock on the New York Stock Exchange on
the date of grant, i.e., forty-eight
<PAGE>2
dollars and seventy five cents ($48.75). These Options must be exercised
within ten (10) years of the effective date of this Agreement or they
expire.
3. Availability for Exercise. 20% of the shares subject to the Options
granted will become available for exercise at the end of each of the five
(5) years following the effective date of this Agreement. For example
. . . 20% of the total number of Options granted will be available for
exercise beginning July 20, 1996; 40% will be available for exercise
beginning July 20, 1997; 60% will be available for exercise beginning
July 20, 1998; 80% will be available for exercise beginning July 20,
1999; and 100% will be available for exercise beginning July 20, 2000.
Once Options become available for exercise, they will remain available
for exercise for so long as EMPLOYEE is employed by the Company unless
they expire. Notwithstanding the foregoing, the Options hereby granted
shall not be exercisable until such time as the common stock to be
issued on exercise of the Options has been registered under the
Securities Act of 1933 or PMSC has otherwise qualified such issuance of
shares under an exemption from registration under said Act.
3A. Change in Control. If there is a Change in Control (as hereinafter
defined) of PMSC prior to the Expiration Date, then, notwithstanding any
other provision of the Plan or this Agreement to the contrary other than
Section 3B below, each Option granted hereby then outstanding shall
become immediately exercisable in full and shall become nonforfeitable
regardless of whether there is a change in office or employment status
subsequent to such Change in Control.
For purposes of this Section, a "Change in Control" shall be deemed to have
occurred in the event: (1) that substantially all of PMSC's assets are
sold to another person, corporation, partnership, or other entity other
than one owned or controlled by PMSC; or (2) any person, corporation,
partnership or other entity, either alone or in conjunction with its
"affiliates" as that term is defined in Rule 405 of the General Rules
and Regulations under the Securities Act of 1933, as amended, or other
group of persons, corporations, partnerships or other entities who are
not affiliates, but who are acting in concert, becomes the owner of
record or beneficially of securities of PMSC which represent thirty-
three and one-third percent (33-1/3%) or more of the combined voting
power of PMSC's then outstanding securities entitled to elect directors;
or (3) the Board or a committee thereof makes a determination in its
reasonable judgment that a Change in Control of PMSC has taken place.
If there is a Change in Control of PMSC prior to the Expiration Date, then
notwithstanding any other provision of the Plan or this Agreement except
Section 3B below: (i) each Option granted hereby then outstanding shall
become immediately exercisable in full regardless of whether there is a
change in office or employment status subsequent to such Change in Control;
(ii) EMPLOYEE shall have a period of ninety (90) days after termination of
employment to exercise the Options granted hereby; and (iii) and in the
event of the death of EMPLOYEE during the aforementioned ninety (90) day
period, said Options may be exercised during a period of one (1) year from
the date of death, as described in Section 10 of the Plan,
<PAGE>3
but in no event shall these Options be exercised after the tenth
anniversary date these Options were granted.
3B. Sale or Merger. In the event of dissolution or liquidation of PMSC or any
merger or combination in which PMSC is not a surviving corporation ("Sale
or Merger"), each outstanding Option granted hereunder shall terminate, but
the Optionee shall have the right, immediately prior to such dissolution,
liquidation, merger or combination, to exercise his or her Option, in whole
or in part, to the extent that it shall not have been exercised, without
regard to any installment exercise provisions.
4. Order of Exercise. The Options may be exercised without regard to the
order in which these and any other Options were granted and without
regard to any unexpired and unexercised qualified, Incentive Stock
Options ("ISO's") or other non-qualified options.
5. Tax Liability. The tax liability which EMPLOYEE may incur relating to
these Options is described below based upon present law and regulations
which are subject to change. Taxes incurred are:
+ when options are granted - none
+ when options are exercised - the difference between the fair market
value of the stock at the date of exercise of an Option and the option
price is a capital gain but generally will be treated as ordinary
income during the year the Option is exercised. Such tax liability
is created at the time EMPLOYEE exercises an Option and PMSC is
required to collect withholding taxes from EMPLOYEE. Federal income
taxes (computed at a rate of 28% of the above described difference)
and FICA and state income taxes (computed at the applicable rate of
the above described difference) are withheld. For example...if the
option price is $33.00 and the fair market value at the date of the
exercise is $38.00, the difference is $5.00, and assuming an
applicable FICA rate of 7.65% and state income tax rate of 7%,
along with the 28% federal income tax, the Company would collect a
tax of $2.13 per share from EMPLOYEE.
+ when shares are sold - the difference between the fair market value at
the date of exercise (the $38.00 in the above example) and the price
at which EMPLOYEE sells the stock is treated the same as above
described during the year in which EMPLOYEE sells the stock
purchased by exercise of his or her options.
6. Exercise and Payment. Exercises of Options shall only be handled pursuant
to the Instructions set forth on the last page of this Agreement. To
exercise these Options, EMPLOYEE shall make payment in full to PMSC for the
option price of the shares to be purchased...plus the combined (federal,
FICA and state) tax liability EMPLOYEE incurs. Such taxes paid to PMSC
will be forwarded to the Internal Revenue Service and appropriate state tax
commission and credited to EMPLOYEE in the same manner as the withholding
tax on EMPLOYEE's
<PAGE>4
salary. EMPLOYEE's actual tax will depend upon the overall tax rate
calculated when EMPLOYEE prepares his or her tax returns. EMPLOYEE should
consult a tax professional regarding questions about EMPLOYEE's actual tax
liability.
7. Noncompetition. In consideration of the Options hereby granted, EMPLOYEE
covenants and agrees that EMPLOYEE shall devote his or her best efforts to
furthering the best interests of PMSC and that for the one (1) year period
from the effective date hereof, and if EMPLOYEE separates from employment
with PMSC for any reason within said one (1) year period, then for a one
(1) year period from the date of such separation from employment, EMPLOYEE
shall not "Compete" with PMSC. The region within which EMPLOYEE agrees
not to Compete with PMSC is the United States, Canada and those countries
in which PMSC has customers or clients as of the date of EMPLOYEE's
separation from employment. For the purpose of this Agreement, the term
"Compete" shall have its commonly understood meaning which shall include,
but not be limited by, the following items with respect to PMSC's insurance
application software licensing, data processing, consulting and information
services businesses and any other businesses carried on by PMSC at the
time of EMPLOYEE's separation from employment:
(i) soliciting or accepting as a client or customer any individual,
partnership, corporation, trust or association that was a client,
customer or actively sought after prospective client or customer
of PMSC during the twelve (12) calendar month period immediately
preceding the date of EMPLOYEE's separation from employment;
(ii) acting as an employee, independent contractor, agent,
representative, consultant, officer, director, or otherwise
affiliated party of any entity or enterprise which is competing
with PMSC in offering similar application software or services to
parties described in (i) above; or
(iii) participating in any such competing entity or enterprise as an
owner, partner, limited partner, joint venturer, creditor or
stockholder (except as an equity holder holding less than a one
percent (1%) interest).
8. Non-Hiring. During EMPLOYEE'S employment with PMSC and for a period of
three (3) years after separation from such employment, EMPLOYEE agrees that
EMPLOYEE shall under no circumstances hire, attempt to hire or assist or be
involved in the hiring of any employee of PMSC either on EMPLOYEE'S behalf
or on behalf of any other person, entity or enterprise. Also, for a
similar period of time, EMPLOYEE agrees to not communicate to any such
person, entity or enterprise the names, addresses or any other information
concerning any employee of PMSC or any past, present or prospective client
or customer of PMSC.
9. Equitable Relief. EMPLOYEE acknowledges (i) that EMPLOYEE'S skill,
knowledge, ability and expertise in the business described herein is of a
special, unique, unusual, extraordinary, and/or intellectual character
which gives said skill, etc. a peculiar value; (ii) that PMSC could
<PAGE>5
not reasonably or adequately be compensated in damages in an action at law
for breach of this Agreement; and (iii) that a breach of any of the
provisions contained in this Agreement could be extremely detrimental to
PMSC and could cause PMSC irreparable injury and damage. Therefore,
EMPLOYEE agrees that PMSC shall be entitled, in addition to any other
remedies it may have under this Agreement or otherwise, to preliminary and
permanent injunctive and other equitable relief to prevent or curtail any
breach of this Agreement; provided, however, that no specification in this
Agreement of a specific legal or equitable remedy shall be construed as a
waiver of or prohibition against the pursuing of other legal or equitable
remedies in the event of such a breach.
10. Breach of Agreement. EMPLOYEE agrees that in the event EMPLOYEE breaches
any provision of this Agreement, PMSC shall be entitled, in addition to any
other remedies it may have under this Agreement, to offset, to the extent
of any liability, loss, damage or injury from such breach, any payments due
to EMPLOYEE pursuant to his or her employment with PMSC.
11. Employment Understanding. This Agreement constitutes the entire agreement
between the parties with regard to the subject matter hereof, and there are
no agreements, understandings, restrictions, warranties or representations
between the parties relating to said subject matter other than those set
forth or provided for herein or in any Agreement Not To Divulge or
employment agreement between PMSC and EMPLOYEE. It is understood that
PMSC's and EMPLOYEE's relationship is one of "at will" employment unless
EMPLOYEE and PMSC have entered into a written employment agreement which
provides otherwise. This Agreement shall not affect, or be affected by,
any employment agreement, if any, between PMSC and EMPLOYEE.
12. General. In the event that any provision of this Agreement or any word,
phrase, clause, sentence or other portion thereof (including, without
limitation, the geographical and temporal restrictions contained herein)
should be held to be unenforceable or invalid for any reason, such
provision or portion thereof shall be modified or deleted in such a manner
so as to make this Agreement enforceable to the fullest extent permitted
under applicable laws. All references to PMSC shall include its
subsidiaries as applicable. This Agreement shall inure to the benefit of
and be enforceable by PMSC and its successors and assigns. No provision
of this Agreement may be changed, modified, waived or terminated, except
by an instrument in writing signed by the party against whom the
enforcement of such is sought. No waiver of any provision or provisions
of this Agreement shall be deemed or shall constitute a waiver of any
other provision, whether or not similar, nor shall any waiver constitute
a continuing waiver. Headings in this Agreement are inserted solely as
a matter of convenience and reference and are not a part of this Agreement
in any substantive sense. This Agreement may be executed in two
counterparts, each of which will take effect as an original and shall
evidence one and the same Agreement.
<PAGE>6
13. Plan Controls. In the event of any discrepancy between this Agreement and
the Plan as to the terms and conditions of the Options, the Plan shall
control.
14. Governing Law. The terms of this Agreement shall be governed by and
construed in accordance with the laws of the State of South Carolina.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as
of the date first above written.
POLICY MANAGEMENT SYSTEMS CORPORATION
"PMSC"
BY: _________________________________
Stephen G. Morrison
TITLE: Executive Vice President
EMPLOYEE
_____________________________________
(Signature)
_____________________________________
(Type or Print Name)
_____________________________________
(Date Signed by Employee)
<PAGE>7
INSTRUCTIONS FOR EXERCISE OF PMSC STOCK OPTIONS
Contact Person: Lynn W. Dillard, Ext. 4303
1A4
Post Office Box Ten
Columbia, SC 29202
An exercise form must be obtained and properly filled out. The form and
employee's check for the appropriate exercise price and withholding taxes
(federal and state income taxes and FICA) must be delivered to the Contact
Person. The Company does not deal with third parties concerning employee's
exercise of his or her stock options. If an employee deals with a brokerage
firm, a bank or any other third party, the employee shall be responsible to keep
such party from impacting on the two-party transaction between the Company and
the employee. This transaction solely consists of employee bringing Company the
exercise form and his or her own check and after several days the Company giving
employee a certificate for his or her shares of stock. The Company's stock
transfer agent is located in New York. If desired, an employee may request and
pay the charges for the certificate to be sent to the Company via Federal
Express. The certificate will only be issued in the employee's name. Employees
may only exercise a whole number of options as PMSC shall not direct the
transfer agent to issue fractional shares.
As an optionholder, an employee is entitled to request copies of the Company's
Annual and Quarterly Reports. An employee will not receive such reports
automatically as an optionholder. Additionally, reports are available upon
request showing a complete list of employee's options outstanding, options
available for exercise, cost per share, total costs, and expiration dates of
options. An employee may wish to request these materials or information before
exercising options by calling or writing the Contact Person.
THESE INSTRUCTIONS ARE SUBJECT TO CHANGE WITHOUT NOTICE.
<PAGE>8
SCHEDULE OF PARTICULARS
FOR NAMED EXECUTIVE OFFICERS
RE: EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT
NAMED EXECUTIVE DATE OF NUMBER OPTION
OFFICER GRANT GRANTED PRICE
Paul R. Butare July 20, 1995 20,000 $48.75
Donald A. Coggiola July 20, 1995 10,000 $48.75
<PAGE>1
EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT
THIS EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT ("the Agreement") is made
effective as of , by and between
("EMPLOYEE") and Policy Management Systems Corporation ("PMSC").
W I T N E S S E T H:
WHEREAS, EMPLOYEE has been employed by PMSC in a position of significant
responsibility and PMSC desires to recognize EMPLOYEE'S contribution to PMSC by
making EMPLOYEE a "Key Employee" as defined in the Policy Management Systems
Corporation 1989 Stock Option Plan ("Plan") and therefore eligible to be granted
Options as defined therein; and
WHEREAS, EMPLOYEE has developed and will continue to develop intimate knowledge
of PMSC's business practices, which, if exploited by EMPLOYEE in contravention
of this Agreement, could seriously, adversely and irreparably affect the
business of PMSC; and
WHEREAS, EMPLOYEE and PMSC each desire to induce the other to enter into this
Agreement; and
WHEREAS, PMSC would not make EMPLOYEE a Key Employee in the event that EMPLOYEE
refused to agree to the terms and conditions of this Agreement and thus EMPLOYEE
would not be eligible to receive Options under the Plan;
NOW, THEREFORE, in consideration of the premises and the mutual promises and
covenants of the parties hereto, EMPLOYEE and PMSC agree as follows:
1. Grant. Effective , PMSC grants EMPLOYEE "non-qualified"
Options to purchase up to shares of PMSC common stock pursuant
to the Plan. Non-qualified options are subject to tax upon exercise as set
forth in paragraph 5 below.
THESE OPTIONS MAY BE REVOKED BY THE COMPENSATION COMMITTEE OF THE BOARD OF
DIRECTORS IN THEIR ABSOLUTE DISCRETION, PRIOR TO THE TIME THEY BECOME
EXERCISABLE IN ACCORDANCE WITH SECTION 9 OF THE PLAN IF THEY DEEM IT
APPROPRIATE TO DO SO BASED UPON SUCH FACTS OR CIRCUMSTANCES AS THEY DEEM
RELEVANT, INCLUDING, WITHOUT LIMITATION, THE RESULTS OR FINDINGS, WHETHER
PRELIMINARY OR FINAL, OF THE VARIOUS INVESTIGATIONS INTO THE COMPANY'S
PREVIOUSLY ISSUED FINANCIAL STATEMENTS.
2. Price and Expiration. The option price of the shares subject to these
Options is the closing price of the stock on the New York Stock Exchange on
the date of grant, i.e., November 8, 1995 ($45.25). These Options must be
exercised within ten (10) years of the effective date of this Agreement or
they expire.
<PAGE>2
3. Availability for Exercise. 20% of the shares subject to the Options granted
will become available for exercise at the end of each of the five (5) years
following the effective date of this Agreement. For example . . . 20% of
the total number of Options granted will be available for exercise beginning
November 8, 1996; 40% will be available for exercise beginning November 8,
1997; 60% will be available for exercise beginning November 8, 1998; 80%
will be available for exercise beginning November 8, 1999; and 100% will be
available for exercise beginning November 8, 2000. Once Options become
available for exercise, they will remain available for exercise for so long
as EMPLOYEE is employed by the Company unless they expire. Notwithstanding
the foregoing, the Options hereby granted shall not be exercisable until
such time as the common stock to be issued on exercise of the Options has
been registered under the Securities Act of 1933 or PMSC has otherwise
qualified such issuance of shares under an exemption from registration under
said Act.
3A. Change in Control. If there is a Change in Control (as hereinafter defined)
of PMSC prior to the Expiration Date, then, notwithstanding any other
provision of the Plan or this Agreement to the contrary other than Section
3B below, each Option granted hereby then outstanding shall become
immediately exercisable in full and shall become nonforfeitable regardless
of whether there is a change in office or employment status subsequent to
such Change in Control.
For purposes of this Section, a "Change in Control" shall be deemed to have
occurred in the event: (1) that substantially all of PMSC's assets are
sold to another person, corporation, partnership, or other entity other than
one owned or controlled by PMSC; or (2) any person, corporation, partnership
or other entity, either alone or in conjunction with its "affiliates" as
that term is defined in Rule 405 of the General Rules and Regulations under
the Securities Act of 1933, as amended, or other group of persons,
corporations, partnerships or other entities who are not affiliates, but who
are acting in concert, becomes the owner of record or beneficially of
securities of PMSC which represent thirty-three and one-third percent (33
1/3%) or more of the combined voting power of PMSC's then outstanding
securities entitled to elect directors; or (3) the Board or a committee
thereof makes a determination in its reasonable judgment that a Change in
Control of PMSC has taken place.
If there is a Change in Control of PMSC prior to the Expiration Date, then
notwithstanding any other provision of the Plan or this Agreement except
Section 3B below: (i) each Option granted hereby then outstanding shall
become immediately exercisable in full regardless of whether there is a
change in office or employment status subsequent to such Change in Control;
(ii) EMPLOYEE shall have a period of ninety (90) days after termination of
employment to exercise the Options granted hereby; and (iii) and in the
event of the death of EMPLOYEE during the aforementioned ninety (90) day
period, said Options may be exercised during a period of one (1) year from
the date of death, as described in Section 10 of the Plan, but in no event
shall these Options be exercised after the tenth anniversary date these
Options were granted.
<PAGE>3
3B. Sale or merger. In the event of dissolution or liquidation of PMSC or any
merger or combination in which PMSC is not a surviving corporation ("Sale
or Merger"), each outstanding Option granted hereunder shall terminate, but
the Optionee shall have the right, immediately prior to such dissolution,
liquidation, merger or combination, to exercise his or her Option, in whole
or in part, to the extent that it shall not have been exercised, without
regard to any installment exercise provisions.
4. Order of Exercise. The Options may be exercised without regard to the order
in which these and any other Options were granted and without regard to any
unexpired and unexercised qualified, Incentive Stock Options ("ISO's") or
other non-qualified options.
5. Tax Liability. The tax liability which EMPLOYEE may incur relating to these
Options is described below based upon present law and regulations which are
subject to change. Taxes incurred are:
+ when options are granted - none
+ when options are exercised - the difference between the fair market
value of the stock at the date of exercise of an Option and the option
price is a capital gain but generally will be treated as ordinary income
during the year the Option is exercised. Such tax liability is created
at the time EMPLOYEE exercises an Option and PMSC is required to collect
withholding taxes from EMPLOYEE. Federal income taxes (computed at a
rate of 28% of the above described difference- or the applicable rate
for the applicable tax jurisdictions) and FICA (or the equivalent type
of payroll/social security tax in the applicable jurisdiction) and state
income taxes (computed at the applicable rate of the above described
difference) are withheld. For example...if the option price is $33.00
and the fair market value at the date of the exercise is $38.00, the
difference is $5.00, and assuming an applicable FICA rate of 7.65% and
state income tax rate of 7%, along with the 28% federal income tax, the
Company would collect a tax of $2.13 per share from EMPLOYEE.
+ when shares are sold - the difference between the fair market value at
the date of exercise (the $38.00 in the above example) and the price at
which EMPLOYEE sells the stock is treated the same as above described
during the year in which EMPLOYEE sells the stock purchased by exercise
of his or her options.
6. Exercise and Payment. Exercises of Options shall only be handled pursuant
to the Instructions set forth on the last page of this Agreement. To
exercise these Options, EMPLOYEE shall make payment in full to PMSC for the
option price of the shares to be purchased...plus the combined (federal,
FICA and state) tax liability EMPLOYEE incurs. Such taxes paid to PMSC will
be forwarded to the Internal Revenue Service and appropriate state tax
commission (or other applicable tax authorities) and credited to EMPLOYEE
in the same manner as the withholding tax on EMPLOYEE's salary. EMPLOYEE's
actual tax will depend upon the overall tax rate calculated when EMPLOYEE
prepares his or her tax returns. EMPLOYEE should consult a tax professional
regarding questions about EMPLOYEE's actual tax liability.
7. Non-competition. In consideration of the Options hereby granted, EMPLOYEE
covenants and agrees that EMPLOYEE shall devote his or her best efforts to
furthering the best interests of
<PAGE>4
PMSC and that during the period of his or her employment with PMSC and for
the periods set forth below following the date of separation from
employment, EMPLOYEE shall not "Compete" with PMSC. The region within which
EMPLOYEE agrees not to Compete with PMSC is the United States, Canada, and
those countries in which PMSC has customers or clients as of the date of
EMPLOYEE's separation from employment. For the purpose of this Agreement,
the term "Compete" shall have its commonly understood meaning which shall
include, but not be limited by, the following items with respect to PMSC's
insurance application software licensing, data processing, consulting and
information services businesses and any other businesses carried on by PMSC
at the time of EMPLOYEE's separation from employment:
(i) for a period of two (2) years, soliciting or accepting as a client
or customer any individual, partnership, corporation, trust or
association that was a client, customer or actively sought after
prospective client or customer of PMSC during the twelve (12)
calendar month period immediately preceding the date of EMPLOYEE's
separation from employment;
(ii) for a period of one (1) year, acting as an EMPLOYEE, independent
contractor, agent, representative, consultant, officer, director,
or otherwise affiliated party of any entity or enterprise which is
competing with PMSC in offering similar application software or
services to parties described in (i) above; or
(iii) for a period of one (1) year, participating in any such competing
entity or enterprise as an owner, partner, limited partner, joint
venturer, creditor or stockholder (except as an equity holder
holding less than a one percent (1%) interest).
8. Non-Hiring. During EMPLOYEE'S employment with PMSC and for a period of
three (3) years after separation from such employment, EMPLOYEE agrees that
EMPLOYEE shall under no circumstances hire, attempt to hire or assist or be
involved in the hiring of any employee of PMSC either on EMPLOYEE'S behalf
or on behalf of any other person, entity or enterprise. Also, for a similar
period of time, EMPLOYEE agrees to not communicate to any such person,
entity or enterprise the names, addresses or any other information
concerning any employee of PMSC or any past, present or prospective client
or customer of PMSC.
9. Equitable Relief. EMPLOYEE acknowledges (i) that EMPLOYEE'S skill,
knowledge, ability and expertise in the business described herein is of a
special, unique, unusual, extraordinary, and/or intellectual character which
gives said skill, etc. a peculiar value; (ii) that PMSC could not reasonably
or adequately be compensated in damages in an action at law for breach of
this Agreement; and (iii) that a breach of any of the provisions contained
in this Agreement could be extremely detrimental to PMSC and could cause
PMSC irreparable injury and damage. Therefore, EMPLOYEE agrees that PMSC
shall be entitled, in addition to any other remedies it may have under this
Agreement or otherwise, to preliminary and permanent injunctive and other
equitable relief to prevent or curtail any breach of this Agreement;
provided, however, that no specification in this Agreement of a specific
legal or equitable remedy shall be construed as a waiver of or prohibition
against the pursuing of other legal or equitable remedies in the event of
such a breach.
10. Breach of Agreement. EMPLOYEE agrees that in the event EMPLOYEE breaches
any provision of this Agreement, PMSC shall be entitled, in addition to any
other remedies it may
<PAGE>5
have under this Agreement, to offset, to the extent of any liability, loss,
damage or injury from such breach, any payments due to EMPLOYEE pursuant to
his or her employment with PMSC.
11. Employment Understanding. This Agreement constitutes the entire agreement
between the parties with regard to the subject matter hereof, and there are
no agreements, understandings, restrictions, warranties or representations
between the parties relating to said subject matter other than those set
forth or provided for herein or in any Agreement Not To Divulge or
employment agreement between PMSC and EMPLOYEE. It is understood that
PMSC's and EMPLOYEE's relationship is one of "at will" employment unless
EMPLOYEE and PMSC have entered into a written employment agreement which
provides otherwise. This Agreement shall not affect, or be affected by, any
employment agreement, if any, between PMSC and EMPLOYEE.
12. General. In the event that any provision of this Agreement or any word,
phrase, clause, sentence or other portion thereof (including, without
limitation, the geographical and temporal restrictions contained herein)
should be held to be unenforceable or invalid for any reason, such provision
or portion thereof shall be modified or deleted in such a manner so as to
make this Agreement enforceable to the fullest extent permitted under
applicable laws. All references to PMSC shall include its subsidiaries as
applicable. This Agreement shall inure to the benefit of and be enforceable
by PMSC and its successors and assigns. No provision of this Agreement may
be changed, modified, waived or terminated, except by an instrument in
writing signed by the party against whom the enforcement of such is sought.
No waiver of any provision or provisions of this Agreement shall be deemed
or shall constitute a waiver of any other provision, whether or not similar,
nor shall any waiver constitute a continuing waiver. Headings in this
Agreement are inserted solely as a matter of convenience and reference and
are not a part of this Agreement in any substantive sense. This Agreement
may be executed in two counterparts, each of which will take effect as an
original and shall evidence one and the same Agreement.
13. Plan Controls. In the event of any discrepancy between this Agreement and
the Plan as to the terms and conditions of the Options, the Plan shall
control.
14. Governing Law. The terms of this Agreement shall be governed by and
construed in accordance with the laws of the State of South Carolina.
<PAGE>6
IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as
of the date first above written.
POLICY MANAGEMENT SYSTEMS CORPORATION
"PMSC"
BY: _________________________________
Stephen G. Morrison
TITLE: Executive Vice President
EMPLOYEE
_____________________________________
(Signature)
_____________________________________
(Type or Print Name)
_____________________________________
(Date Signed by Employee)
<PAGE>7
INSTRUCTIONS FOR EXERCISE OF PMSC STOCK OPTIONS
Contact Person: Lynn W. Dillard, Ext. 4303
1A4
Post Office Box Ten
Columbia, SC 29202
An exercise form must be obtained and properly filled out. The form and
employee's check for the appropriate exercise price and withholding taxes
(federal and state income taxes and FICA) must be delivered to the Contact
Person. The Company does not deal with third parties concerning employee's
exercise of his or her stock options. If an employee deals with a brokerage
firm, a bank or any other third party, the employee shall be responsible to keep
such party from impacting on the two-party transaction between the Company and
the employee. This transaction solely consists of employee bringing Company the
exercise form and his or her own check and after several days the Company giving
employee a certificate for his or her shares of stock. The Company's stock
transfer agent is located in New York. If desired, an employee may request and
pay the charges for the certificate to be sent to the Company via Federal
Express. The certificate will only be issued in the employee's name. Employees
may only exercise a whole number of options as PMSC shall not direct the
transfer agent to issue fractional shares.
As an optionholder, an employee is entitled to request copies of the Company's
Annual and Quarterly Reports. An employee will not receive such reports
automatically as an optionholder. Additionally, reports are available upon
request showing a complete list of employee's options outstanding, options
available for exercise, cost per share, total costs, and expiration dates of
options. An employee may wish to request these materials or information before
exercising options by calling or writing the Contact Person.
THESE INSTRUCTIONS ARE SUBJECT TO CHANGE WITHOUT NOTICE.
<PAGE>8
SCHEDULE OF PARTICULARS
FOR NAMED EXECUTIVE OFFICERS
RE: EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT
NAMED EXECUTIVE DATE OF NUMBER OPTION
OFFICER GRANT GRANTED PRICE
Donald A. Coggiola November 8, 1995 50,000 $45.25
Paul R. Butare November 8, 1995 100,000 $45.25
<PAGE>1
AMENDMENT NO. 1
TO THE
EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT
BETWEEN
PAUL BUTARE AND PMSC
This Addendum is effective on November 8, 1995, and is hereby made a part of
and incorporated into the Employee Stock Option/Non-Compete Agreement
(hereinafter referred to as "Agreement") by and between POLICY MANAGEMENT
SYSTEMS CORPORATION ("PMSC") and Paul Butare ("EMPLOYEE"), dated with an
effective date of July 20, 1995. In the event that any provision of this
Addendum and any provision of the Agreement are inconsistent or conflicting,
the inconsistent or conflicting provision of this Addendum shall be and
constitute an amendment of the Agreement and shall control, but only to the
extent that such provision is inconsistent or conflicting with the Agreement.
PMSC and Employee hereby agree to amend the Agreement as follows:
1. The following terms and conditions are added as new Sections 3A, 3B and
3C to the Agreement:
3A. Change in Control. If there is a Change in Control (as
hereinafter defined) of PMSC prior to the Expiration Date, then,
notwithstanding any other provision of the Plan or this Agreement
to the contrary other than Section 1 above and 3B below, each
Option granted hereby then outstanding shall become immediately
exercisable in full and shall become nonforfeitable regardless of
whether there is a change in office or employment status
subsequent to such Change in Control.
For purposes of this Section, a "Change in Control" shall be
deemed to have occurred in the event: (1) that substantially all
of PMSC's assets are sold to another person, corporation,
partnership, or other entity other than one owned or controlled by
PMSC; or (2) any person, corporation, partnership or other entity,
either alone or in conjunction with its "affiliates" as that term
is defined in Rule 405 of the General Rules and Regulations under
the Securities Act of 1933, as amended, or other group of persons,
corporations, partnerships or other entities who are not
affiliates, but who are acting in concert, becomes the owner of
record or beneficially of securities of PMSC which represent
thirty-three and one-third percent (33 1/3%) or more of the
combined voting power of PMSC's then outstanding securities
entitled to elect directors; or (3) the Board or a committee
thereof makes a determination in its reasonable judgment that a
Change in Control of PMSC has taken place.
If there is a Change in Control of PMSC prior to the Expiration
Date, then notwithstanding any other provision of the Plan or this
Agreement except Sections 1 above and 3B below: (i) each Option
granted hereby then outstanding shall become immediately
exercisable in full regardless of whether there is a change in
office or employment status subsequent to such Change in Control;
(ii) EMPLOYEE shall have a period of ninety (90) days after
termination of employment to exercise the Options granted hereby;
and (iii) and in the event of
<PAGE>2
the death of EMPLOYEE during the aforementioned ninety (90) day
period, said Options may be exercised during a period of one (1)
year from the date of death, as described in Section 10 of the
Plan, but in no event shall these Options be exercised after the
tenth anniversary date these Options were granted.
3B. Sale or merger. In the event of dissolution or liquidation of
PMSC or any merger or combination in which PMSC is not a surviving
corporation ("Sale or Merger"), each outstanding Option granted
hereunder shall terminate, but the EMPLOYEE shall have the right,
immediately prior to such dissolution, liquidation, merger or
combination, to exercise his or her Option, in whole or in part,
to the extent that it shall not have been exercised, without
regard to any installment exercise provisions.
3C. Additional Compensation. In the event a Change in Control or Sale
or Merger, as described in Sections 3A and 3B above, occurs while
EMPLOYEE is employed by PMSC and occurs prior to the Expiration
Date, then in addition to the exercise rights granted, EMPLOYEE
also shall be compensated based on the following formula, subject
to the following conditions, EMPLOYEE may elect by written notice
to PMSC's General Counsel the following in lieu of all other
compensation from PMSC:
(a) EMPLOYEE shall be paid an annual salary for two (2) years
following a Change in Control or Sale or Merger consisting
of one hundred percent (100%) of the average amount of total
cash compensation of EMPLOYEE for the two (2) calendar years
prior to the time of such Change in Control or Sale or
Merger. For purposes of the foregoing, "average amount of
total cash compensation" shall include salary and bonuses,
but shall specifically exclude income attributable to the
granting or exercising of stock options.
(b) Notwithstanding any of the provisions of this Agreement, the
amount of all payments to be made pursuant to this Agreement
after a Change of Control or a Sale or Merger shall not
exceed one dollar ($1.00) less than that amount which would
cause any such payment to be deemed a "parachute payment" as
defined in Section 280G of the Internal Revenue Code of 1986
(the "Code"), as amended, and as said statute is then in
effect at the time of such payment.
(c) Any payments made to EMPLOYEE following a Change of Control
or a Sale or Merger that shall be disallowed, in whole or in
part, as a deductible expense to PMSC for Federal income
tax purposes by the Internal Revenue Service on the basis
that Section 280G of the Code prohibits such deduction shall
be reimbursed by EMPLOYEE to the full extent of said
disallowance within six (6) months after the date on which
the amount of said disallowance has been finally determined
and PMSC has paid the deficiency with respect to said
disallowance. PMSC shall
<PAGE>3
legally defend any proposed disallowance by the Internal
Revenue Service and the amount required to be reimbursed by
EMPLOYEE shall be the amount determined by an appropriate
court in a final, nonappealable decision that is actually
disallowed as a deduction. In lieu of payment to PMSC by
EMPLOYEE, PMSC may, in its discretion, withhold amounts from
EMPLOYEE's future compensation payments until the amount
owed to PMSC has been fully recovered. No such withholding
shall occur prior to the date on which EMPLOYEE would be
required to make reimbursement as provided herein.
(d) If the limitation set forth in (b) may at any time become
applicable to the amounts otherwise due pursuant to
paragraph (a) then PMSC shall continue to pay EMPLOYEE all
amounts as provided under paragraph (a) until such time as
cumulative payments equal the aggregate amount as limited by
paragraph (b) and EMPLOYEE may terminate his employment on
three (3) months notice at any time within the last twelve
(12) months of the time period during which the payments
described in this Section 3C will be paid without affecting
his rights to receive said payments.
(e) PMSC shall have no obligation to pay the amounts set forth
in (a) as limited by (b) if there is reasonable proof that
the non-competition or non-hire provisions of Sections 7 and
8 of this Agreement are being violated.
(f) In the event of termination of employment of EMPLOYEE for
Cause, as hereinafter defined, following a Change of Control
or Sale or Merger, PMSC shall not be obligated to make any
further payments of the compensation amounts provided for in
this Section. Notwithstanding any other provision of this
Agreement, except for (d) and (i) hereinafter which shall
control in the event EMPLOYEE terminates employment as
provided in (d) and (i), in the event EMPLOYEE voluntarily
terminates employment following a Change of Control or Sale
or Merger for other than Good Reason, as defined
hereinafter, compensation amounts set forth in (a) and (b)
shall be payable only for a one (1) year period following
termination of employment.
"Cause" for the purposes of this Section is defined to mean:
(1) willful failure to substantially perform prescribed
duties other than as a result of disability; or (2) willful
engagement in misconduct significantly detrimental to PMSC.
"Good Reason" to terminate employment with PMSC occurs if:
(1) duties are assigned that are materially inconsistent
with previous duties; (2) duties and responsibilities are
substantially reduced; (3) base compensation is reduced not
as part of an across the board reduction for all senior
officers or executives; (4) participation under compensation
plans or arrangements generally made available to persons at
<PAGE>4
EMPLOYEE's level of responsibility at PMSC is denied; (5) a
successor fails to assume this Agreement; or (6) termination
is made without compliance with prescribed procedures.
(g) In the event EMPLOYEE is involuntarily terminated by PMSC
without Cause or EMPLOYEE voluntarily terminates employment
for Good Reason, PMSC's obligation to pay the compensation
amounts provided in this Section shall survive termination
of employment.
(h) Further, in the event of termination of employment during
the pendency of a "Potential Change of Control", as
hereinafter defined, the provisions of (f) and (g) shall
apply as if an actual Change of Control or Sale or Merger
had taken place. A Potential Change of Control shall be
deemed to have occurred if: (1) PMSC has entered into an
agreement or letter of intent the consummation of which
would result in a Change of Control or Sale or Merger; (2)
any person publicly announces an intention to take or to
consider taking actions which if consummated would
constitute a Change of Control or Sale or Merger; or (3) the
Board of Directors of PMSC or a Committee thereof in its
reasonable judgment makes a determination that a Potential
Change of Control for purposes of this Agreement has
occurred. A Potential Change of Control remains pending for
purposes of receiving payments under this Section until the
earlier of the occurrence of a Change of Control or Sale or
Merger or a determination by the Board of Directors or a
committee thereof (at any time) that a Change of Control or
Sale or Merger is no longer reasonably expected to occur.
(i) Notwithstanding anything contained in this Agreement to the
contrary, EMPLOYEE and PMSC or the person, corporation,
partnership or other entity acquiring control of PMSC, with
the concurrence of the Chief Executive Officer and
Compensation Committee of the Board of Directors of PMSC,
may mutually agree that EMPLOYEE, with three (3) months'
notice, may terminate his employment and receive a lump sum
payment equal to the present value of remaining payments
under this Agreement discounted by the then current Treasury
Bill rate for the remaining term of this Section.
2. Section 7 of the Agreement is deleted in its entirety and replaced with
the following:
7. Non-competition. In consideration of the Options hereby granted,
EMPLOYEE covenants and agrees that EMPLOYEE shall devote his or
her best efforts to furthering the best interests of PMSC and that
during the period of his or her employment with PMSC and for the
periods set forth below following the date of separation from
employment, EMPLOYEE shall not "Compete" with PMSC. The region
within which EMPLOYEE agrees not to Compete with PMSC is the
United States, Canada, and those countries in which PMSC has
customers or clients as of the date of EMPLOYEE's separation from
employment. For the purpose of this Agreement, the term "Compete"
shall have its commonly
<PAGE>5
understood meaning which shall include, but not be limited by, the
following items with respect to PMSC's insurance application
software licensing, data processing, consulting and information
services businesses and any other businesses carried on by PMSC
at the time of EMPLOYEE's separation from employment:
(i) for a period of two (2) years, soliciting or accepting as a
client or customer any individual, partnership, corporation,
trust or association that was a client, customer or actively
sought after prospective client or customer of PMSC during the
twelve (12) calendar month period immediately preceding the
date of EMPLOYEE's separation from employment;
(ii) for a period of one (1) year, acting as an EMPLOYEE, independent
contractor, agent, representative, consultant, officer, director,
or otherwise affiliated party of any entity or enterprise which
is competing with PMSC in offering similar application software
or services to parties described in (i) above; or
(iii) for a period of one (1) year, participating in any such competing
entity or enterprise as an owner, partner, limited partner, joint
venturer, creditor or stockholder (except as an equity holder
holding less than a one percent (1%) interest).
The parties certify by their undersigned authorized agents that they have read
this Addendum and the Agreement and agree to be bound by their terms and
conditions.
PMSC EMPLOYEE
POLICY MANAGEMENT SYSTEMS PAUL BUTARE
CORPORATION
BY: BY: _________
(AUTHORIZED SIGNATURE)
(in non-black ink, please) (in non-black ink,
please)
Stephen G. Morrison
(NAME)
Executive Vice President
and General Counsel
<PAGE>1
STOCK OPTION/NON-COMPETE AGREEMENT
THIS STOCK OPTION/NON-COMPETE AGREEMENT ("the Agreement") is made effective as
of February 1, 1994, by and between Timothy V. Williams ("Employee") and POLICY
MANAGEMENT SYSTEMS CORPORATION ("PMSC").
W I T N E S S E T H:
WHEREAS, Employee has been employed by PMSC in a position of significant
responsibility and PMSC desires to recognize Employee's contribution to PMSC by
making Employee a "Key Employee" as defined in the Policy Management Systems
Corporation 1989 Stock Option Plan ("Plan") and therefore eligible to be granted
Options as defined therein;
WHEREAS, Employee has developed and will continue to develop intimate knowledge
of PMSC's business practices, which, if exploited by Employee in contravention
of this Agreement, could seriously, adversely and irreparably affect the
business of PMSC; and
WHEREAS, Employee and PMSC each desire to induce the other to enter into this
Agreement; and
WHEREAS, PMSC would not make Employee a Key Employee in the event that Employee
refused to agree to the terms and conditions of this Agreement and thus Employee
would not be eligible to receive Options under the Plan.
NOW, THEREFORE, in consideration of the premises and the mutual promises and
covenants of the parties hereto, Employee and PMSC agree as follows:
1. Grant. Effective February 1, 1994, PMSC grants Employee "non-qualified"
Options to purchase up to 25,000 shares of PMSC common stock pursuant to
the Plan. Non-qualified options are subject to tax upon exercise as set
forth in paragraph 5 below.
<PAGE>2
2. Price and Expiration. The option price of the shares subject to these
Options is the closing price of the stock on the New York Stock Exchange
on the date of grant, i.e., February 1, 1994. These Options must be
exercised within ten (10) years of the effective date of this Agreement or
they expire.
3. Availability for Exercise. 33 1/3% of the shares subject to the Options
granted will become available for exercise at the end of each of the three
(3) years following the effective date of this Agreement. For example...
33 1/3% of the total number of Options granted will be available for
exercise beginning February 1, 1995; 66 2/3% will be available for
exercise beginning February 1, 1996; and 100% will be available for
exercise beginning February 1, 1997. Once Options become available for
exercise, they will remain available for exercise unless they expire.
4. Order of Exercise. The Options may be exercised without regard to the
order in which these and any other Options were granted and without regard
to any unexpired and unexercised qualified, Incentive Stock Options
("ISO's") or other non-qualified options.
5. Tax Liability. The tax liability which Employee may incur relating to
these Options is described below based upon present law and regulations
which are subject to change. Taxes incurred are:
. when options are granted - none;
. when options are exercised - the difference between the fair market
value of the stock at the date of exercise of an Option and the
option price is a capital gain but generally will be treated as
ordinary income during the year the Option is exercised. Such tax
liability is created at the time Employee exercises an Option and
PMSC is required to collect withholding taxes from Employee.
Federal income taxes (computed at a rate of 20% of the above
described difference) and FICA and state income taxes (computed at
the applicable rate of the above described difference) are
withheld. For example... if the option price is $69.38 and the
fair market value at the date of the exercise is $74.38, the
difference is $5.00, and assuming an applicable FICA rate of 7.65%
and state income tax rate of 7%, along with the 20% federal income
tax, the Company would collect a tax of $1.73 per share from
Employee;
. when shares are sold - the difference between the fair market value
at the date of exercise (the $74.38 in the above example) and the
price at which Employee sells the stock is treated the same as
above described during the year in which Employee sells stock
purchased by exercise of his or her options.
6. Exercise and Payment. Exercises of Options shall only be handled pursuant
to the Instructions set forth on the last page of this Agreement. To
exercise these Options,
<PAGE>3
Employee shall make payment in full to PMSC for the option price of the
shares to be purchased plus the combined (federal, FICA and state) tax
liability Employee incurs. Such taxes paid to PMSC will be forwarded to
the Internal Revenue Service and appropriate state tax commission and
credited to Employee in the same manner as the withholding tax on
Employee's salary. Employee's actual tax will depend upon the overall tax
rate calculated when Employee prepared his tax returns. Employee should
consult a tax professional regarding questions about Employee's actual tax
liability.
7. Non-competition. In consideration of the Options hereby granted, Employee
covenants and agrees that Employee shall devote his best efforts to
furthering the best interests of PMSC and that for the one (1) year period
from the effective date hereof, and if Employee separates from employment
with PMSC for any reason within said one (1) year period, then for one (1)
year period from the date of such separation from employment, Employee
shall not "Compete" with PMSC. The region within which Employee agrees
not to Compete with PMSC is the United States, Canada and those countries
in which PMSC has customers or clients as of the date of Employee's
separation from employment. For the purpose of this Agreement, the term
"Compete" shall have its commonly understood meaning which shall include,
but not be limited by, the following items with respect to PMSC's
insurance application software licensing, data processing, consulting and
information services businesses and any other businesses carried on by
PMSC at the time of Employee's separation from employment:
(i) soliciting or accepting as a client or customer any individual,
partnership, corporation, trust or association that was a client,
customer or actively sought after prospective client or customer
of PMSC during the twelve (12) calendar month period immediately
preceding the date of Employee's separation from employment;
(ii) acting as an employee, independent contractor, agent,
representative, consultant, officer, director, or otherwise
affiliated party of any entity or enterprise which is competing
with PMSC in offering similar application software or services to
parties described in (i) above; or
(iii) participating in any such competing entity or enterprise as an
owner, partner, limited partner, joint venturer, creditor or
stockholder (except as an equity holder holding less than a one
percent (1%) interest).
8. Non-Hiring. During Employee's employment with PMSC and for a period of
three (3) years after separation from such employment, Employee agrees
that Employee shall under no circumstances hire, attempt to hire or assist
or be involved in the hiring of any employee of PMSC either on Employee's
behalf or on behalf of any other person, entity or enterprise. Also, for
a similar period of time, Employee agrees to not communicate to any such
person,
<PAGE>4
entity or enterprise the names, addresses or any other information
concerning any employee of PMSC or any past, present or prospective client
or customer of PMSC.
9. Equitable Relief. Employee acknowledges: (i) that Employee's skill,
knowledge, ability and expertise in the business described herein is of a
special unique, unusual, extraordinary, and/or intellectual character
which gives said skill, etc. a peculiar value; (ii) that PMSC could not
reasonably or adequately be compensated in damages in an action at law for
breach of this Agreement; and (iii) that a breach of any of the provisions
contained in this Agreement could be extremely detrimental to PMSC and
could cause PMSC irreparable injury and damage. Therefore, Employee
agrees that PMSC shall be entitled, in addition to any other remedies it
may have under this Agreement or otherwise, to preliminary and permanent
injunctive and other equitable relief to prevent or curtail any breach of
this Agreement; provided, however, that no specification in this Agreement
of a specific legal or equitable remedy shall be construed as a waiver of
or prohibition against the pursuing of other legal or equitable remedies
in the event of such a breach.
10. Breach of Agreement. Employee agrees that in the event Employee breaches
any provision of this Agreement, PMSC shall be entitled, in addition to
any other remedies it may have under this Agreement, to offset, to the
extent of any liability, loss, damage or injury from such breach, any
payments due to Employee pursuant to his employment with PMSC.
11. Employment Understanding. This Agreement and the Employment Agreement
between Employee and PMSC constitute the entire agreement between the
parties with regard to the subject matter hereof, and there are no
agreements, understandings, restrictions, warranties or representations
between the parties relating to said subject matter other than those set
forth or provided for herein or in any Agreement Not To Divulge or
employment agreement between PMSC and Employee.
12. General. In the event that any provision of this Agreement or any word,
phrase, clause, sentence or other portion thereof (including, without
limitation, the geographical and temporal restrictions contained herein)
should be held to be unenforceable or invalid for any reason, such
provision or portion thereof shall be modified or deleted in such a manner
so as to make this Agreement enforceable to the fullest extent permitted
under applicable laws. All references to PMSC shall include its
subsidiaries as applicable. This Agreement shall inure to the benefit of
and be enforceable by PMSC and its successors and assigns. No provision
of this Agreement may be changed, modified, waived or terminated, except
by an instrument in writing signed by the party against whom the
enforcement of such is sought. No waiver of any provision or provisions
of this Agreement shall be deemed or shall constitute a waiver of any
other provision, whether or not similar, nor shall any waiver constitute
a continuing waiver. Headings in this Agreement are inserted solely as a
matter of convenience and reference and are not a part of this Agreement
in any substantive sense. This Agreement may be executed in two
counterparts, each of which will take effect as an original and shall
evidence one and the same Agreement.
<PAGE>5
13. Plan Controls. In the event of any discrepancy between this Agreement and
the Plan as to the terms and conditions of the Options, the Plan shall
control.
14. Governing Law. The terms of this Agreement shall be governed by and
construed in accordance with the laws of the State of South Carolina.
<PAGE>6
IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as
of the date first above written.
PMSC
POLICY MANAGEMENT SYSTEMS
CORPORATION
BY: __________________________
G. Larry Wilson
TITLE: President
Employee
__________________________
Effective Date: _________, 1994
Date Signed: ____________, 1994
<PAGE>7
INSTRUCTIONS FOR EXERCISE OF PMSC STOCK OPTIONS
Contact Person: Lynn W. Dillard, Ext. 4303
2B1
Post Office Box Ten, Columbia, SC 29202
An exercise form must be obtained and properly filled out. The form and
employee's check for the appropriate exercise price and withholding taxes
(federal and state income taxes and FICA) must be delivered to the Contact
Person. The Company does not deal with third parties concerning employee's
exercise of his or her stock options. If an employee deals with a brokerage
firm, a bank or any other third party, the employee shall be responsible to keep
such party from impacting on the two-party transaction between the Company and
the employee. This transaction solely consists of employee bringing Company the
exercise form and his or her own check and after several days the Company giving
employee a certificate for his or her shares of stock. The Company's stock
transfer agent is located in New York. If desired, an employee may request and
pay the charges for the certificate to be sent to the Company via Federal
Express. The certificate will only be issued in the employee's name. Employees
may only exercise a whole number of options as PMSC shall not direct the
transfer agent to issue fractional shares.
As an optionholder, an employee is entitled to request copies of the Company's
Annual and Quarterly Reports. An employee will not receive such reports
automatically as an optionholder. Additionally, reports are available upon
request showing a complete list of employee's options outstanding, options
available for exercise, cost per share, total costs, and expiration dates of
options. An employee may wish to request these materials or information before
exercising options by calling or writing the Contact Person.
THESE INSTRUCTIONS ARE SUBJECT TO CHANGE WITHOUT NOTICE.
<PAGE>1
EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT
THIS EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT ("the Agreement") is made
effective as of May 10, 1995, by and between Timothy V. Williams ("EMPLOYEE")
and Policy Management Systems Corporation ("PMSC").
W I T N E S S E T H:
WHEREAS, EMPLOYEE has been employed by PMSC in a position of significant
responsibility and PMSC desires to recognize EMPLOYEE'S contribution to PMSC by
making EMPLOYEE a "Key Employee" as defined in the Policy Management Systems
Corporation 1989 Stock Option Plan ("Plan") and therefore eligible to be granted
Options as defined therein; and
WHEREAS, EMPLOYEE has developed and will continue to develop intimate knowledge
of PMSC's business practices, which, if exploited by EMPLOYEE in contravention
of this Agreement, could seriously, adversely and irreparably affect the
business of PMSC; and
WHEREAS, EMPLOYEE and PMSC each desire to induce the other to enter into this
Agreement; and
WHEREAS, PMSC would not make EMPLOYEE a Key Employee in the event that EMPLOYEE
refused to agree to the terms and conditions of this Agreement and thus EMPLOYEE
would not be eligible to receive Options under the Plan;
NOW, THEREFORE, in consideration of the premises and the mutual promises and
covenants of the parties hereto, EMPLOYEE and PMSC agree as follows:
1. Grant. Effective May 10, 1995, PMSC grants EMPLOYEE "non-qualified"
Options to purchase up to 25,000 shares of PMSC common stock pursuant to
the Plan. Non-qualified options are subject to tax upon exercise as set
forth in paragraph 5 below.
THESE OPTIONS MAY BE REVOKED BY THE COMPENSATION COMMITTEE OF THE BOARD OF
DIRECTORS IN THEIR ABSOLUTE DISCRETION, PRIOR TO THE TIME THEY BECOME
EXERCISABLE IN ACCORDANCE WITH SECTION 9 OF THE PLAN IF THEY DEEM IT
APPROPRIATE TO DO SO BASED UPON SUCH FACTS OR CIRCUMSTANCES AS THEY DEEM
RELEVANT, INCLUDING, WITHOUT LIMITATION, THE RESULTS OR FINDINGS, WHETHER
PRELIMINARY OR FINAL, OF THE VARIOUS INVESTIGATIONS INTO THE COMPANY'S
PREVIOUSLY ISSUED FINANCIAL STATEMENTS.
2. Price and Expiration. The option price of the shares subject to these
Options is the closing price of the stock on the New York Stock Exchange
on the date of grant, i.e., forty-nine dollars
<PAGE>2
($49.00). These Options must be exercised within ten (10) years of the
effective date of this Agreement or they expire.
3. Availability for Exercise. 20% of the shares subject to the Options
granted will become available for exercise at the end of each of the five
(5) years following the effective date of this Agreement. For example.
..20% of the total number of Options granted will be available for
exercise beginning May 10, 1996; 40% will be available for exercise
beginning May 10, 1997; 60% will be available for exercise beginning May
10, 1998; 80% will be available for exercise beginning May 10, 1999; and
100% will be available for exercise beginning May 10, 2000. Once Options
become available for exercise, they will remain available for exercise for
so long as EMPLOYEE is employed by the Company unless they expire.
Notwithstanding the foregoing, the Options hereby granted shall not be
exercisable until such time as the common stock to be issued on exercise
of the Options has been registered under the Securities Act of 1933 or
PMSC has otherwise qualified such issuance of shares under an exemption
from registration under said Act.
3A. Change in Control. If there is a Change in Control (as hereinafter
defined) of PMSC prior to the Expiration Date, then, notwithstanding any
other provision of the Plan or this Agreement to the contrary other than
Section 3B below, each Option granted hereby then outstanding shall
become immediately exercisable in full and shall become nonforfeitable
regardless of whether there is a change in office or employment status
subsequent to such Change in Control.
For purposes of this Section, a "Change in Control" shall be deemed to
have occurred in the event: (1) that substantially all of PMSC's assets
are sold to another person, corporation, partnership, or other entity
other than one owned or controlled by PMSC; or (2) any person,
corporation, partnership or other entity, either alone or in conjunction
with its "affiliates" as that term is defined in Rule 405 of the General
Rules and Regulations under the Securities Act of 1933, as amended, or
other group of persons, corporations, partnerships or other entities who
are not affiliates, but who are acting in concert, becomes the owner of
record or beneficially of securities of PMSC which represent thirty-three
and one-third percent (33-1/3%) or more of the combined voting power of
PMSC's then outstanding securities entitled to elect directors; or (3) the
Board or a committee thereof makes a determination in its reasonable
judgment that a Change in Control of PMSC has taken place.
If there is a Change in Control of PMSC prior to the Expiration Date, then
notwithstanding any other provision of the Plan or this Agreement except
Section 3B below: (i) each Option granted hereby then outstanding shall
become immediately exercisable in full regardless of whether there is a
change in office or employment status subsequent to such Change in
Control; (ii) EMPLOYEE shall have a period of ninety (90) days after
termination of employment to exercise the Options granted hereby; and
(iii) and in the event of the death of EMPLOYEE during the aforementioned
ninety (90) day period, said Options may be exercised during a period of
one (1) year from the date of death, as described in Section 10 of the
Plan,
<PAGE>3
but in no event shall these Options be exercised after the tenth
anniversary date these Options were granted.
3B. Sale or Merger. In the event of dissolution or liquidation of PMSC or any
merger or combination in which PMSC is not a surviving corporation ("Sale
or Merger"), each outstanding Option granted hereunder shall terminate,
but the Optionee shall have the right, immediately prior to such
dissolution, liquidation, merger or combination, to exercise his or her
Option, in whole or in part, to the extent that it shall not have been
exercised, without regard to any installment exercise provisions.
4. Order of Exercise. The Options may be exercised without regard to the
order in which these and any other Options were granted and without regard
to any unexpired and unexercised qualified, Incentive Stock Options
("ISO's") or other non-qualified options.
5. Tax Liability. The tax liability which EMPLOYEE may incur relating to
these Options is described below based upon present law and regulations
which are subject to change. Taxes incurred are:
+ when options are granted - none
+ when options are exercised - the difference between the fair market
value of the stock at the date of exercise of an Option and the
option price is a capital gain but generally will be treated as
ordinary income during the year the Option is exercised. Such tax
liability is created at the time EMPLOYEE exercises an Option and
PMSC is required to collect withholding taxes from EMPLOYEE.
Federal income taxes (computed at a rate of 28% of the above
described difference) and FICA and state income taxes (computed at
the applicable rate of the above described difference) are withheld.
For example...if the option price is $33.00 and the fair market
value at the date of the exercise is $38.00, the difference is
$5.00, and assuming an applicable FICA rate of 7.65% and state
income tax rate of 7%, along with the 28% federal income tax, the
Company would collect a tax of $2.13 per share from EMPLOYEE.
+ when shares are sold - the difference between the fair market value
at the date of exercise (the $38.00 in the above example) and the
price at which EMPLOYEE sells the stock is treated the same as above
described during the year in which EMPLOYEE sells the stock
purchased by exercise of his or her options.
6. Exercise and Payment. Exercises of Options shall only be handled pursuant
to the Instructions set forth on the last page of this Agreement. To
exercise these Options, EMPLOYEE shall make payment in full to PMSC for
the option price of the shares to be purchased...plus the combined
(federal, FICA and state) tax liability EMPLOYEE incurs. Such taxes paid
to PMSC will be forwarded to the Internal Revenue Service and appropriate
state tax commission and credited to EMPLOYEE in the same manner as the
withholding tax on EMPLOYEE's
<PAGE>4
salary. EMPLOYEE's actual tax will depend upon the overall tax rate
calculated when EMPLOYEE prepares his or her tax returns. EMPLOYEE should
consult a tax professional regarding questions about EMPLOYEE's actual tax
liability.
7. Noncompetition. In consideration of the Options hereby granted, EMPLOYEE
covenants and agrees that EMPLOYEE shall devote his or her best efforts to
furthering the best interests of PMSC and that for the one (1) year period
from the effective date hereof, and if EMPLOYEE separates from employment
with PMSC for any reason within said one (1) year period, then for a one
(1) year period from the date of such separation from employment, EMPLOYEE
shall not "Compete" with PMSC. The region within which EMPLOYEE agrees
not to Compete with PMSC is the United States, Canada and those countries
in which PMSC has customers or clients as of the date of EMPLOYEE's
separation from employment. For the purpose of this Agreement, the term
"Compete" shall have its commonly understood meaning which shall include,
but not be limited by, the following items with respect to PMSC's
insurance application software licensing, data processing, consulting and
information services businesses and any other businesses carried on by
PMSC at the time of EMPLOYEE's separation from employment:
(i) soliciting or accepting as a client or customer any individual,
partnership, corporation, trust or association that was a client,
customer or actively sought after prospective client or customer
of PMSC during the twelve (12) calendar month period immediately
preceding the date of EMPLOYEE's separation from employment;
(ii) acting as an employee, independent contractor, agent,
representative, consultant, officer, director, or otherwise
affiliated party of any entity or enterprise which is competing
with PMSC in offering similar application software or services
to parties described in (i) above; or
(iii) participating in any such competing entity or enterprise as an
owner, partner, limited partner, joint venturer, creditor or
stockholder (except as an equity holder holding less than a one
percent (1%) interest).
8. Non-Hiring. During EMPLOYEE'S employment with PMSC and for a period of
three (3) years after separation from such employment, EMPLOYEE agrees
that EMPLOYEE shall under no circumstances hire, attempt to hire or assist
or be involved in the hiring of any employee of PMSC either on EMPLOYEE'S
behalf or on behalf of any other person, entity or enterprise. Also, for
a similar period of time, EMPLOYEE agrees to not communicate to any such
person, entity or enterprise the names, addresses or any other information
concerning any employee of PMSC or any past, present or prospective client
or customer of PMSC.
9. Equitable Relief. EMPLOYEE acknowledges (i) that EMPLOYEE'S skill,
knowledge, ability and expertise in the business described herein is of a
special, unique, unusual, extraordinary, and/or intellectual character
which gives said skill, etc. a peculiar value; (ii) that PMSC could
<PAGE>5
not reasonably or adequately be compensated in damages in an action at law
for breach of this Agreement; and (iii) that a breach of any of the
provisions contained in this Agreement could be extremely detrimental to
PMSC and could cause PMSC irreparable injury and damage. Therefore,
EMPLOYEE agrees that PMSC shall be entitled, in addition to any other
remedies it may have under this Agreement or otherwise, to preliminary and
permanent injunctive and other equitable relief to prevent or curtail any
breach of this Agreement; provided, however, that no specification in this
Agreement of a specific legal or equitable remedy shall be construed as a
waiver of or prohibition against the pursuing of other legal or equitable
remedies in the event of such a breach.
10. Breach of Agreement. EMPLOYEE agrees that in the event EMPLOYEE breaches
any provision of this Agreement, PMSC shall be entitled, in addition to
any other remedies it may have under this Agreement, to offset, to the
extent of any liability, loss, damage or injury from such breach, any
payments due to EMPLOYEE pursuant to his or her employment with PMSC.
11. Employment Understanding. This Agreement constitutes the entire agreement
between the parties with regard to the subject matter hereof, and there
are no agreements, understandings, restrictions, warranties or
representations between the parties relating to said subject matter other
than those set forth or provided for herein or in any Agreement Not To
Divulge or employment agreement between PMSC and EMPLOYEE. It is
understood that PMSC's and EMPLOYEE's relationship is one of "at will"
employment unless EMPLOYEE and PMSC have entered into a written employment
agreement which provides otherwise. This Agreement shall not affect, or
be affected by, any employment agreement, if any, between PMSC and
EMPLOYEE.
12. General. In the event that any provision of this Agreement or any word,
phrase, clause, sentence or other portion thereof (including, without
limitation, the geographical and temporal restrictions contained herein)
should be held to be unenforceable or invalid for any reason, such
provision or portion thereof shall be modified or deleted in such a manner
so as to make this Agreement enforceable to the fullest extent permitted
under applicable laws. All references to PMSC shall include its
subsidiaries as applicable. This Agreement shall inure to the benefit of
and be enforceable by PMSC and its successors and assigns. No provision
of this Agreement may be changed, modified, waived or terminated, except
by an instrument in writing signed by the party against whom the
enforcement of such is sought. No waiver of any provision or provisions
of this Agreement shall be deemed or shall constitute a waiver of any
other provision, whether or not similar, nor shall any waiver constitute
a continuing waiver. Headings in this Agreement are inserted solely as a
matter of convenience and reference and are not a part of this Agreement
in any substantive sense. This Agreement may be executed in two
counterparts, each of which will take effect as an original and shall
evidence one and the same Agreement.
<PAGE>6
13. Plan Controls. In the event of any discrepancy between this Agreement and
the Plan as to the terms and conditions of the Options, the Plan shall
control.
14. Governing Law. The terms of this Agreement shall be governed by and
construed in accordance with the laws of the State of South Carolina.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as
of the date first above written.
POLICY MANAGEMENT SYSTEMS CORPORATION
"PMSC"
BY: _________________________________
Stephen G. Morrison
TITLE: Executive Vice President
EMPLOYEE
_____________________________________
(Signature)
_____________________________________
(Type or Print Name)
_____________________________________
(Date Signed by Employee)
<PAGE>7
INSTRUCTIONS FOR EXERCISE OF PMSC STOCK OPTIONS
Contact Person: Lynn W. Dillard, Ext. 4303
1A4
Post Office Box Ten
Columbia, SC 29202
An exercise form must be obtained and properly filled out. The form and
employee's check for the appropriate exercise price and withholding taxes
(federal and state income taxes and FICA) must be delivered to the Contact
Person. The Company does not deal with third parties concerning employee's
exercise of his or her stock options. If an employee deals with a brokerage
firm, a bank or any other third party, the employee shall be responsible to keep
such party from impacting on the two-party transaction between the Company and
the employee. This transaction solely consists of employee bringing Company the
exercise form and his or her own check and after several days the Company giving
employee a certificate for his or her shares of stock. The Company's stock
transfer agent is located in New York. If desired, an employee may request and
pay the charges for the certificate to be sent to the Company via Federal
Express. The certificate will only be issued in the employee's name. Employees
may only exercise a whole number of options as PMSC shall not direct the
transfer agent to issue fractional shares.
As an optionholder, an employee is entitled to request copies of the Company's
Annual and Quarterly Reports. An employee will not receive such reports
automatically as an optionholder. Additionally, reports are available upon
request showing a complete list of employee's options outstanding, options
available for exercise, cost per share, total costs, and expiration dates of
options. An employee may wish to request these materials or information before
exercising options by calling or writing the Contact Person.
THESE INSTRUCTIONS ARE SUBJECT TO CHANGE WITHOUT NOTICE.
<PAGE>1
Exhibit 11
Statement Regarding Computation of Per Share Earnings
Year ended December 31,
1995 1994 1993
(In Thousands, Except Per
Share Data)
Primary net income (loss) per share
Net income (loss):
Net income (loss) as
reported $3,139 $(9,658) $(56,134)
Shares:
Weighted average number
of common shares
outstanding 19,391 20,865 22,858
Common stock equivalents
(stock options) 291 104 143
Primary shares 19,682 20,969 23,001
Primary net income (loss)
per share $ .16 $ (.46) $(2.44)
Fully diluted net income (loss) per share
Net income (loss):
Net income (loss) as
reported $3,139 $(9,658) $(56,134)
Shares:
Weighted average number
of common shares
outstanding 19,391 20,865 22,858
Common stock equivalents
(exercisable stock
options whether or not
dilutive) 1,120 878 767
Fully diluted shares 20,511 21,743 23,625
Fully diluted net income
(loss) per share $ .15 $ (.44) $(2.38)
<PAGE>1
POLICY MANAGEMENT SYSTEMS CORPORATION'S SUBSIDIARIES
As of the close of business 12/31/95
SUBSIDIARY JURISDICTION OF INCORPORATION
NAME OR ORGANIZATION
Advanced Integrated Client Server Insurance Alabama
Technologies
Policy Management Systems International, Ltd. Delaware
Policy Management Corporation South Carolina
Policy Management Systems Canada, Ltd Canada
Policy Management Systems Europe, Limited United Kingdom
Portsmouth IT Services Limited United Kingdom
PMS Asi-Pacific Pty. Limited Australia
PMS Asia Pacific Limited Hong Kong
Policy Management Systems (Barbados), Ltd. Barbados
Policy Management Systems (Germany), GmbH Germany
CYBERTEK Corporation Texas
Policy Management Systems Investment, Inc. Delaware
Policy Management Systems Osterreich GmbH Austria
Policy Management Systems Norden A.S. Norway
Policy Management Systems Norden Aktiebolag Sweden
PMS Creative Limited United Kingdom
Creative Insurance Services Limited United Kingdom
Creative Software Development Limited United Kingdom
Creative Computer Systems Pty Limited Australia
Creative Solutions BV The Netherlands
Information Services Holding, Inc. Delaware
Software Services Holding, Inc. Delaware
Life Software Holding, Inc. Delaware
PMSI, L.P. (also does business as Texas Limited Partnership
"Medical Correspondence Services")
Cybertek Solutions, L.P. Texas Limited Partnership
Micado Beteiligungs Und Verwaltungs GmbH Germany
Micado SoftwareConsult GmbH Germany
Micado ProductSysteme Gesellschaft
Fur EDV Vetrieb mbH Germany
Micado Service Rechenzentrum GmbH Germany
Micado ComputerColleg GmbH Germany
Micado ConsultSoftware AG Switzerland
<PAGE>1
Exhibit 23
Consent of Independent Accountants
We consent to the incorporation by reference in the registration statements of
Policy Management Systems Corporation (the"Company") on Form S-8 (Nos. 33-
59553, 33-59555, and 33-59575 of our report dated February 12, 1996 on our
audits of the consolidated financial statements and financial statement
schedules of the Company as of December 31, 1995 and 1994 and for each of the
three years in the period ended December 31, 1995, which report is included in
this annual report on form 10-K.
Coopers & Lybrand
Atlanta, Georgia
March 29, 1996
