<PAGE>1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1996 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 (I.R.S. Employer
of incorporation) Identification No.)
One PMSC Center (P.O. Box Ten)
Blythewood, S.C. (Columbia, S.C.) 29016 (29202)
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (803) 735-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
18,178,869 Common shares, $.01 par value, as of November 14,1996
The information furnished herein reflects all adjustments which are, in the
opinion of management, necessary for the fair presentation of the results for
the periods reported. Such information should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
<PAGE>2
POLICY MANAGEMENT SYSTEMS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Income for
the three and nine months ended September 30,
1996 and 1995..................................... 3
Consolidated Balance Sheets as of
September 30, 1996 and December 31, 1995.......... 4
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1996 and 1995. 5
Notes to Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................ 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................26
Item 6. Exhibits and Reports on Form 8-K....................27
Signatures....................................................28
<PAGE>3 PART I
FINANCIAL INFORMATION
<TABLE>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(Unaudited) (Unaudited)
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Revenues
Licensing.......................... $ 24,186 $ 24,518 $ 74,320 $ 72,798
Services........................... 122,812 106,704 343,193 325,346
146,998 131,222 417,513 398,144
Operating expenses
Cost of revenues
Employee compensation & benefits... 47,192 38,401 131,523 116,448
Computer and communications
expenses......................... 7,967 7,160 24,038 21,353
Information services and
data acquisition costs........... 29,981 26,806 87,890 88,173
Depreciation and amortization of
property, equipment and
capitalized software costs....... 12,539 12,683 35,512 36,750
Other costs & expenses............. 13,669 10,984 29,419 30,555
Selling, general and administrative
expenses.......................... 18,023 15,734 52,691 47,771
Amortization of goodwill and
other intangibles................. 2,616 2,330 7,777 6,715
Litigation settlement and
expenses, net.................... - - (9,422) 6,216
Gain on sale of Health business
and related assets............... - - - (8,116)
Business acquisition charges........ 109 - 99 -
Impairment and restructuring
credits, net..................... (394) 6 (461) ( 240)
131,702 114,104 359,066 345,625
Operating income .................... 15,296 17,118 58,447 52,519
Other Income and Expenses:
Investment income.................. 376 654 1,898 1,612
Interest expense and other
charges.......................... (1,475) (658) (3,544) (2,176)
(1,099) ( 4) (1,646) (564)
Income before income taxes........... 14,197 17,114 56,801 51,955
Income taxes......................... 5,190 5,520 20,363 16,951
Net income........................... $ 9,007 $ 11,594 $ 36,438 $ 35,004
Net income per share................. $ .50 $ .60 $ 1.94 $ 1.81
Weighted average number of shares.... 18,179 19,401 18,747 19,376
<FN>
See accompanying notes.
</TABLE>
<PAGE>4
TABLE
<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(Unaudited) (Audited)
September 30, December 31,
1996 1995
(In Thousands,
Except Share Data)
<S> <C> <C>
Assets
Current assets
Cash and equivalents................................... $ 8,030 $ 35,094
Marketable securities.................................. 2,400 4,615
Receivables, net of allowance for uncollectible
amounts of $806 ($2,042 at 1995).................. 102,937 95,740
Income tax receivable.................................. 14,908 25,089
Deferred income taxes.................................. 15,770 10,261
Other.................................................. 16,663 17,833
Total current assets................................ 160,708 188,632
Property and equipment, at cost less accumulated
depreciation and amortization of $116,589
($103,568 at 1995).................................. 113,504 109,183
Receivables.............................................. 5,539 5,885
Goodwill and other intangibles assets, net............... 84,352 89,319
Capitalized software costs, net.......................... 170,642 145,982
Deferred income taxes.................................... 1,376 2,335
Investments.............................................. 6,496 4,905
Other.................................................... 5,755 5,492
Total assets..................................... $548,372 $551,733
Liabilities
Current liabilities
Accounts payable and accrued expenses.................. $ 49,538 $ 70,673
Accrued restructuring charges.......................... 3,875 9,456
Accrued contract termination costs..................... 425 1,154
Current portion of long-term debt...................... - 1,766
Income taxes payable................................... 7,268 10
Unearned revenues...................................... 10,021 11,350
Other.................................................. 32 -
Total current liabilities........................... 71,159 94,409
Long-term debt........................................... 57,750 14,873
Deferred income taxes.................................... 62,895 52,701
Accrued restructuring charges............................ 1,940 4,439
Other.................................................... 3,310 2,639
Total liabilities................................... 197,054 169,061
Commitments and contingencies (Note 1)
Stockholders' Equity
Special stock, $.01 par value, 5,000,000 shares
authorized............................................ - -
Common stock, $.01 par value, 75,000,000 shares
authorized, 18,178,869 shares issued and
outstanding (19,436,114 at December 31, 1995)......... 182 194
Additional paid-in capital............................... 106,094 173,402
Retained earnings........................................ 246,551 210,113
Foreign currency translation adjustment.................. (1,509) (1,037)
Total stockholders' equity.......................... 351,318 382,672
Total liabilities and stockholders' equity....... $548,372 $551,733
<FN>
See accompanying notes.
</TABLE>
<PAGE>5
<TABLE>
CAPTION
<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
1996 1995
(In Thousands)
<S> <C> <C>
Operation Activities
Net income...................................... $ 36,438 $ 35,004
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................. 45,507 44,985
Deferred income taxes......................... 6,342 8,790
Provision for uncollectible accounts.......... 456 262
Changes in assets and liabilities:
Accrued restructuring and lease
termination costs........................... (8,080) (4,795)
Receivables................................... (4,742) (4,988)
Income taxes receivable....................... 10,181 4,533
Accounts payable and accrued expenses......... (21,421) (6,201)
Income taxes payable.......................... 6,561 1,394
Other, net...................................... (2,001) (8,300)
Cash provided by operations................ 69,241 70,684
Investing Activities
Proceeds from sales/maturities of marketable
securities..................................... 2,850 7,778
Purchases of marketable securities.............. - (3,694)
Investment in nonconsolidated affiliate......... (2,315) -
Acquisition of property and equipment........... (20,676) (17,579)
Capitalized internal software development
costs.......................................... (41,953) (32,621)
Purchased software.............................. (1,192) (250)
Proceeds from disposal of property and
equipment...................................... 747 827
Business acquisition............................ (6,777) -
Contract acquisition costs...................... - (10,000)
Cash (used) by investing
activities............................... (69,316) (55,539)
Financing Activities
Payments on long-term debt...................... (138,693) (6,945)
Proceeds from borrowing under credit facility... 179,550 27,678
Issuance of common stock under stock
option plans................................... 6,283 2,863
Repurchase of common stock...................... (73,603) -
Cash (used) provided by financing
activities............................... (26,463) 23,596
Effect of exchange rate changes on cash........... (526) (50)
Net (decrease)increase in cash and
equivalents..................................... (27,064) 38,691
Cash and equivalents at beginning of period....... 35,094 17,686
Cash and equivalents at end of period............. $ 8,030 $ 56,377
Supplemental Information
Interest paid................................... 2,265 1,555
Income taxes (refunded) paid.................... (3,464) 1,456
<FN>
See accompanying notes.
</TABLE>
<PAGE>6<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 1. CONTINGENCIES
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 is involved in a lawsuit with Security Life of Denver ("SLD")
alleging, among other things, breach of a life insurance joint development
contract. The Company is also presently involved in litigation with Liberty Life
Insurance Company arising out of the Company's change in the direction of its
future life software systems development following the acquisition of CYBERTEK.
The Company has asserted various affirmative defenses, claims and counterclaims
and is vigorously pursuing prompt resolutions of these matters through all
available legal processes (see Item 3, Legal Proceedings, of Part I contained in
the Company's Annual Report on Form 10-K for the year ended December 31, 1995).
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 (see Item 3, Legal Proceedings, of Part I contained in
the Company's Annual Report on Form 10-K for the Year ended December 31, 1995)
In May 1996, after nine weeks of trial, the parties agreed that CSAA would
dismiss its claim against the Company in return for the Company dismissing its
counterclaim against CSAA. The agreement also resolves a collateral proceeding
by the Company against CSAA and Computer Sciences Corporation which was
pending in another jurisdiction and arose out of the agreement which was the
basis of the California proceeding.
<PAGE>7
Based upon the allegations raised in the CSAA and SLD lawsuits, the Company's
insurer, St. Paul Mercury Insurance Company ("St. Paul"), commenced in 1995 a
declaratory judgment action against the Company to determine St. Paul's
obligation for defense costs and to indemnify the Company for any payment
related to these claims. The Company filed a counterclaim against St. Paul
seeking 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 (see Item 3, Legal Proceedings, of Part I contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995)
In connection with the Company reaching an agreement with CSAA for the
dismissal of the CSAA matter, St. Paul and the Company agreed to dismiss with
prejudice all claims against each other with respect to the CSAA matter, and St.
Paul agreed to reimburse the Company for the Company's legal fees in the CSAA
matter (in excess of its deductible) with interest. As a result of this
recovery, the Company recorded a gain of $9.4 million in the second quarter
of 1996. This agreement resolves the Company's and St. Paul's claims related
to the CSAA matter; however, the action will continue as to the parties'
claims related to insurance coverage for the SLD matter.
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.
NOTE 2. NEW ACCOUNTING STANDARDS
On January 1, 1996, the Company formally adopted 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 abandoned.
As the Company's accounting policies prior to the adoption of SFAS 121 have
provided for similar accounting treatment, the effect of adoption was not
material to the Company's financial condition or results of operations.
<PAGE>8
Also on January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation". The 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 ("APB 25")
and disclose pro forma net income and earnings per share assuming the fair value
method had been applied. The Company has elected to adopt the disclosure
alternative in its annual financial statements and continue accounting for its
stock-based compensation plans in accordance with APB 25.
NOTE 3. RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to current year
presentation.
NOTE 4. ACQUISITIONS
On August 9, 1996, the Company acquired certain assets of Co-Cam Pty Ltd. and
related entities ("Co-Cam") for $6.3 million. Co-Cam, whose software and
services include superannuation and pension administration systems, operates
in Australia, New Zealand, the United Kingdom and certain Southeast Asia
nations. The acquisition has been recorded using the purchase method of
accounting.
<PAGE>9<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the consolidated financial statements and
notes thereto contained in Part I of this report on Form 10-Q and with the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
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>
1996 vs 1995
Percent Increase
(Decrease)
Percentage Percentage Three Nine
of Revenues of Revenues Months Months
Three Months Nine Months Ended Ended
Ended September 30, Ended September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Revenues
Licensing..................... 16.4 18.7 17.8 18.2 (1.3) 2.1
Services...................... 83.6 81.3 82.2 81.8 15.1 5.5
100.0 100.0 100.0 100.0 12.0 4.9
Operating expenses
Cost of revenues
Employee compensation
and benefits................. 32.1 29.2 31.5 29.2 22.9 12.9
Computer & communication
expenses..................... 5.4 5.5 5.8 5.4 11.3 12.6
Information services & data
acquisition costs............ 20.4 20.4 21.0 22.1 11.8 (.3)
Depreciation & amortization
of property, equipment &
capitalized software costs... 8.5 9.7 8.5 9.2 (1.1) (3.4)
Other costs & expenses......... 9.3 8.4 7.1 7.7 24.4 (3.7)
Selling, general &
administrative expenses....... 12.3 12.0 12.6 12.0 14.6 10.3
Amortization of goodwill and
other intangibles............. 1.8 1.8 1.9 1.7 12.3 15.8
Litigation settlement and
expenses, net................. - - (2.3) 1.6 - (100.0)
Gain on sale of Health
business and related assets... - - - (2.0) - (100.0)
Business acquisition charges.... .1 - - - 100.0 -
Impairment and restructuring
credits, net.................. (.3) - (.1) (.1) (100.0) -
89.6 87.0 86.0 86.8 15.4 3.9
Operating income................ 10.4 13.0 14.0 13.1 (10.6) 11.3
Other income and expenses....... (.7) - (.4) (.1) 100.0 100.0
Income before income taxes...... 9.7 13.0 13.6 13.0 (17.0) 9.3
Income taxes.................... 3.5 4.2 4.9 4.2 (6.0) 20.1
Net income...................... 6.2 8.8 8.7 8.8 (22.3) 4.1
</TABLE>
<PAGE>10
THREE MONTHS COMPARISON
A comparison of revenues for each line of business and geographic market
for the periods presented is as follows:
<TABLE>
<CAPTION>
Three Months
Ended September 30,
1996 1995 Change
(Dollars in Millions)
<S> <C> <C> <C>
Line of Business
Property & Casualty.... $103.7 $ 96.0 8.0 %
Life................... 43.3 35.2 23.0
Geographic Market
United States.......... $109.8 $ 98.7 11.2 %
International.......... 37.2 32.5 14.5
</TABLE>
Revenues
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
Licensing September 30,1996 September 30,1995 Change
(Dollars in Millions)
<S> <C> <C> <C>
Initial charges................ $ 10.1 $ 11.3 (10.6)%
Monthly charges................ 14.1 13.2 6.8 %
$ 24.2 $ 24.5 (1.2)%
Percentage of revenues......... 16.4% 18.7%
</TABLE>
Initial license revenues decreased $1.2 million from the third quarter of 1995
to the third quarter of 1996.
Life insurance initial licensing revenues increased 86.4% ($2.7 million) from
third quarter 1995 to third quarter 1996. These were offset by lower property
and casualty licensing revenues, as initial licensing revenues declined by
$1.4 million domestically and $2.5 million internationally from the third
quarter of 1995 to the third quarter of 1996. Property and casualty licensing
revenues in the United States are being impacted by various market factors
including heightened focus by many insurance companies on their year 2000
projects and the lack of availability of certain "open" systems architectures
in the Company's property and casualty products. The Company has initiatives
underway to address these issues including new releases of Series III,
Insure 90, Point and Capsil and programs to assist those companies, not
currently customers, with near-term year 2000 solutions.
<PAGE>11
Right-to-use charges (excluding further MESA obligations), and termination
charges generally (related to the buy-out of monthly license agreements) were
insignificant in the third quarter of 1996 and 1995. During the third quarter
1996 one customer accounted for $3.1 million of life insurance initial license
charges representing a standard initial license of $1.0 million and a perpetual
license of $2.1 million. The customer is paying these charges
and its MESA obligations monthly over a six year period.
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 quarter to quarter. Set forth below is a comparison of initial
license revenues for the preceding seven quarters expressed as a percentage of
total revenues for each of the periods presented:
<TABLE>
<CAPTION>
1996 1995 1994
3rd 2nd 1st 4th 3rd 2nd* 1st* 4th*
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property and Casualty
Initial license revenues $4.2 $6.0 $7.3 $13.8 $8.1 $7.3 $8.0 $5.6
Total revenues 2.9% 4.4% 5.5% 9.9% 6.2% 5.5% 6.0% 5.8%
Life
Initial license revenues $5.8 $6.0 $3.1 $ 2.3 $3.2 $2.1 $3.7 $1.6
Total revenues 4.0% 4.4% 2.3% 1.7% 2.4% 1.6% 2.8% 1.3%
<FN>
*Excludes licensing activity of the Company's Health Insurance Systems business, sold June
30, 1995. First and second quarter 1995 licensing revenues (initial and monthly licensing
charges) related to the Health business were $.6 million and $.3 million, respectively.
</TABLE>
<PAGE>12
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
Services September 30,1996 September 30,1995 Change
(Dollars In Millions)
<S> <C> <C> <C>
Professional and outsourcing... $ 81.6 $ 64.7 26.1 %
Information.................... 39.7 41.6 ( 4.6)%
Other.......................... 1.5 .4 275.0 %
$122.8 $106.7 15.1 %
Percentage of revenues......... 83.6% 81.3%
</TABLE>
Property and casualty professional and outsourcing services revenues increased
26.0% ($13.1 million). Domestic property and casualty professional and
outsourcing services revenues increased 23.0% ($7.9 million) due to increases
in the volume of services provided to new and existing customers. International
property and casualty professional and outsourcing services revenues increased
32.4% ($5.2 million), principally due to services activity of micado, acquired
October 1, 1995, Co-Cam Pty Ltd., acquired August 9, 1996 and increases in the
volume of services provided to new and existing customers. The growth
rate of these services, excluding the impact of the acquisitions, was 16.5%.
The life insurance professional and outsourcing services revenue increased
25.7% ($3.7 million) over third quarter 1995, domestic life insurance
professional and outsourcing services increased 36.4% ($3.0 million), and
international life insurance professional and outsourcing services revenues
increased 11.6% ($.7 million), due principally to increased volumes of services
to new and existing international customers.
Information services revenues decreased 4.6% from third quarter of 1995 to the
third quarter of 1996. However, when risk information services (ceased and
abandoned operations in the fourth quarter of 1995) are excluded from the
comparison, information services revenues increased 11.3%. This increase is
due in part to an increase of 6.0% ($.9 million) in life insurance information
services principally comprised of attending physician statements and Infinity
information services. Also contributing to this increase is an increase in
property and casualty information services revenues of 17.2% ($3.4 million)
which consists principally of fees for domestic motor vehicle reports as a
result of the Company's November 1995 alliance with a leading database
information enterprise.
<PAGE>13
OPERATING EXPENSES
Cost of Revenues
Overall employee compensation and benefits increased 22.9% from third quarter
1995 to third quarter 1996, principally as a result of the increases in both
international and domestic development and professional services staffing and
the Company's acquisition on October 1, 1995 of micado (compensation expense
of $1.6 million for the quarter) and August 9, 1996 of Co-Cam Pty Ltd.
(compensation expense of $1.2 million for the quarter). Offsetting these
increases was the effect of the Company's divestiture of its risk information
services business in December 1995, which lowered compensation and benefits
expense by approximately $3.7 million.
Computer and communications expenses increased 11.3% principally as a result
of lease expense associated with leases entered into as part of the Company's
fourth quarter 1995 restructure of its data processing facilities. As part of
this restructuring, the Company entered into 2 and 4 year renewable lease
agreements for certain data processing equipment, which are intended to
enable the Company to make use of the latest technology and improve the
quality of service to its customers while allowing the Company to benefit from
projected decreases in unit costs of this technology. The increase in lease
expense resulting from the restructuring was offset by the decrease in
depreciation expense discussed below.
Information services and data acquisition costs increased 11.8%, due
principally to increases of 14.4% in property and casualty information costs
arising from increased volume of motor vehicle reports and 4.8% in life
insurance information services, arising from increased volume of attending
physician statements. These increases are consistent with the trend in
information services revenues as discussed in Revenues above.
Depreciation and amortization of property, equipment and capitalized software
costs decreased 1.1%. This decrease is principally due to lower depreciation
expense resulting from the Company's fourth quarter 1995 restructuring of its
data processing facilities. This decrease in depreciation expense was offset
in part by an increase in amortization resulting principally from the
March 1996 release of the latest version of CyberLife client/server life
insurance software.
<PAGE>14
Other operating costs and expenses increased 24.4% Fees associated with the
use of consultants and independent contractors increased, principally as a
result of training in new technologies and the staffing needs for certain
development and services activities. The increase was partially offset by an
increase in amounts capitalized principally related to the increased use of
outside resources in the continued enhancement and development of the Company's
Series III property and casualty insurance software and CyberLife life
insurance software as well as other ongoing development projects, and decreased
costs associated with the depopulation of certain assigned risk pools
serviced by the Company's total policy management business.
Selling, general and administrative expenses
Selling, general and administrative expenses increased 14.6%, principally
because of the Company's investment in its international sales force and
infrastructure.
Amortization of goodwill and other intangibles
The 12.3% increase in amortization of goodwill and other intangibles is
principally the result of amortization of intangible assets related to the
acquisition of micado on October 1, 1995.
OPERATING INCOME
Third quarter 1996 operating income decreased 10.6% ($1.8 million) compared
with the 1995 third quarter, before the effects of restructuring credits
recorded during the third quarter 1996. This decline has largely been caused
by the current period increase in expenditures in the Company's international
infrastructure, including its sales force, professional services organization
and product development areas. Partially offsetting this effect was the
increase in the percentage of total revenues represented by professional
services from 17.3% of total revenues for third quarter 1995 to 25.2% of
total revenues for third quarter 1996.
OTHER INCOME AND EXPENSE
As a result of a higher average level of borrowed funds, principally
borrowings under the Company's credit facilities, interest expense increased
$.8 million. The average nominal interest rate applicable to borrowings under
these facilities during the third quarter was 6.07%.
<PAGE>15
INCOME TAXES
The effective income tax rate (income taxes expressed as a percentage of
pre-tax income) was 36.6% and 32.3% for the three months ended September 30,
1996 and 1995, respectively. The effective rate for the third quarter of 1996
is higher than the federal statutory rate principally due to the effect of
state and local income taxes; however the effect of state and local income
taxes has been offset in part by the effect of the Company's expensing, during
1996 for tax purposes, certain intangible assets related to the abandonment of
certain of the Company's domestic property and casualty risk information
services activities. The effective rate for 1995 was significantly lower than
the federal statutory rate due principally to goodwill, deducted for tax
purposes, relating to the sale of the Company's Health Insurance Systems
Division.
<PAGE>16
NINE MONTHS COMPARISON
A comparison of revenues for each line of business and geographic market for
the periods presented is as follows:
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1996 1995 Change
(Dollars in Millions)
<S> <C> <C> <C>
Line of Business
Property & Casualty... $291.3 $288.0 1.1%
Life.................. 126.2 101.9 23.9
Health................ .* 7.9*
Geographic Market
United States......... $309.9 $306.3 1.2%
International......... 107.6 91.8 17.2
<FN>
*The Company's Health Insurance Systems business was divested June 30, 1995.
</TABLE>
Revenues
<TABLE>
<CAPTION>
Nine Nine
Months Ended Months Ended
Licensing September 30,1996 September 30,1995 Change
(Dollars in Millions)
<S> <C> <C> <C>
Initial charges................... $32.5 $32.7 ( .6)%
Monthly charges................... 41.8 40.1 4.2 %
$74.3 $72.8 2.1 %
Percentage of revenues............ 17.8% 18.3%
</TABLE>
Life insurance initial license charges increased 67.9% ($6.0 million). This
increase was offset by a decrease of 25.2% ($5.9 million) in property and
casualty initial license charges. However, initial license charges for the
first nine months of 1995 included a $4.0 million non-recurring source code
license agreement with a cross-industry vendor and $4.7 million related to
joint marketing and distribution arrangements with NCR Corporation, formerly
AT&T Global Information Solutions. These revenues were replaced in part by a
large Series III license executed during the first quarter of 1996, the
$3.1 million initial license charge described in the three month comparison,
and $2.9 million in initial license charge revenues of micado, acquired
October 1, 1995.
<PAGE>17
Initial license charges for the first nine months of 1996 include right-to-use
charges (licenses excluding further MESA obligations) of $3.0 million compared
to $4.6 million (inclusive of the $4.0 million source code license referred
to above) for the first nine months of 1995. Initial license charges for the
period also include termination charges (related to the buyout of monthly
license charges) of $0 and $1.4 million for the first nine months of 1996 and
1995, respectively.
<TABLE>
<CAPTION>
Nine Nine
Months Ended Months Ended
Services September 30,1996 September 30,1995 Change
(Dollars in Millions)
<S> <C> <C> <C>
Professional and outsourcing... $221.7 $191.3 15.9 %
Information.................... 118.5 132.6 (10.6)%
Other.......................... 3.0 1.4 114.3 %
$343.2 $325.3 5.5 %
Percentage of revenues......... 82.2% 81.7%
</TABLE>
Overall professional and outsourcing services revenues increased 15.9%
however, when revenues of the Company's health business (sold June 30, 1995)
are excluded from the comparison, the increase is 25.6%.
Property and casualty professional and outsourcing services revenues increased
16.3% ($23.6 million). Domestic professional and outsourcing revenues increased
9.5%; however, excluding total policy management revenues, domestic professional
and outsourcing services revenues increased 23.3% ($13.1 million) principally
due to increased volumes of professional services associated with new and
existing customers. This increase was offset in part by the effects of
depopulation of certain assigned risk pools serviced by the Company's total
policy management business and the change to six month policies from twelve
month policies of the Florida Joint Underwriting Authority. International
professional and outsourcing services revenues increased 31.2% ($14.2 million),
principally as a result of the October 1, 1995 acquisition of micado and
increased services activity to new and existing customers in other areas of
Europe.
Life insurance professional and outsourcing services revenues increased
overall by 34.2% ($13.7 million). Domestic life insurance professional and
outsourcing services revenues increased 56.9% ($11.5 million) principally as
a result of an increase in the volume of services provided to new and existing
customers, including implementation services and total policy administration
services. International life insurance professional and outsourcing services
revenues increased 7.3% ($1.4 million), principally in the European and
Nordic regions.
<PAGE>18
Information services revenue decreased 10.7%; however, excluding risk
information services revenues (ceased and abandoned in the fourth quarter
1995), information services revenues increased 3.4% ($3.9 million). Domestic
property and casualty automobile information services revenues were relatively
flat for the first nine months of 1996 as compared to the first nine months of
1995, although, principally as a result of the Company's 1995 alliance with a
leading database information enterprise, these third quarter 1996 revenues are
approximately 26.3% higher than fourth quarter 1995 levels. Life insurance
information services revenues increased 7.1%, principally as a result of
revenue associated with the Company's Infinity services.
OPERATING EXPENSES
Cost of Revenues
Overall employee compensation and benefits increased 12.9% from the first nine
months of 1995 to the first nine months of 1996, principally due to increases in
international development and professional services staffing, the October 1,
1995 acquisition of micado ( compensation expense of $4.0 million) and the
August 10, 1996 acquisition of Co-Cam Pty. Ltd.(compensation expense of $1.2
million). The effect of the Company's divestitures of its health and risk
information services businesses in June 1995 and December 1995, respectively,
was to lower compensation and benefits expense by approximately $15.9 million.
However, this effect was offset by compensation expense associated with
increased domestic development and professional services staffing.
Computer and communications expenses increased 12.6%, resulting principally
from the effect of licensing expense related to the Company's long-term
license and maintenance agreement (entered into March 27, 1995) to acquire
rights to certain operating system management software products for use in
the Company's worldwide data center operations, and the effect of lease
expense associated with leases entered into as part of the Company's
restructuring of its data processing facilities discussed in the three month
Operating Expense discussion above.
Information services and data acquisition costs decreased .3%, due principally
to a 2.1% decrease in state fees for motor vehicle reports associated with the
Company's domestic property and casualty information services, similar to the
trend discussed in Revenues above. This decrease was offset in part by an
increase of 5.1% in the volume of expenses for attending physician statements
related to the provision of certain life insurance information services.
<PAGE>19
Depreciation and amortization of property, equipment and capitalized software
costs decreased 3.4%. This decrease is principally due to lower depreciation
expense resulting from the Company's fourth quarter 1995 restructure of its
data processing facilities. This decrease in depreciation expense was offset
in part by increased amortization resulting principally from the March 1996
release of the latest version of CyberLife client/server life insurance
software.
Other operating costs and expenses decreased 3.7%. Fees related to the use of
consultants and independent contractors increased, principally the result of
training costs in new technologies and the satisfaction of staffing needs for
certain development and services activities. These increases were offset by an
increase in amounts capitalized principally related to the increased use of
outside resources in the continued enhancement and development of the
Company's Series III property and casualty insurance software and CyberLife
life insurance software as well as other ongoing development projects, and
decreased costs associated with the depopulation of certain assigned risk
pools serviced by the Company's total policy management business.
Selling, general and administrative expenses
Selling, general and administrative expenses increased 10.3%, principally due
to the Company's investment in its international sales force and
infrastructure.
Litigation settlement and expenses, net
In May 1996, the Company resolved its litigation with the California State
Automobile Association Inter-Insurance Bureau and the California State
Automobile Association ("CSSA"), concluding with an agreement for the mutual
dismissal of all related claims and counter claims as well as the Company's
recovery of certain defense costs incurred relative to the CSAA matter, with
interest. As a result, the Company recorded a $9.4 million gain for this
recovery during the second quarter.
During the first quarter of 1995, the Company and its insurance carrier agreed
to settle amounts contested related to the reimbursement of certain costs
incurred by the Company in connection with 1994 settlement of its securities
class action. 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 which had previously been recorded in
the fourth quarter of 1994.
<PAGE>20
The Company, during the second quarter of 1995, provided for $7.9 million in
estimated litigation costs arising from certain pending litigation to which the
Company was both a defendant and counter-claimant. The costs provided for
included, but were not limited to, fees paid or anticipated to be paid to
external counsel and other costs related to the Company's defense and claims
regarding these matters.
Gain on sale of Health business and related assets
On June 30, 1995 the Company completed the sale of its Health Insurance
Systems Division for a total consideration of $9.3 million cash. After
selling expense and other accrued costs the Company recorded a pre-tax gain
of $8.1 million.
Amortization of goodwill and other intangibles
The 15.8% increase in amortization of goodwill and other intangibles is
principally the result of amortization of intangible assets related to the
acquisition of micado on October 1, 1995.
OPERATING INCOME
Operating income increased 11.3% ($5.9 million). Excluding the effects of the
litigation recovery on the 1996 results, the gain on the sale of the health
business and provision for litigation costs on the 1995 results operating
income fell by $1.6 million (3.1%).
OTHER INCOME AND EXPENSE
As a result of a higher average level of borrowed funds, principally
borrowings under the Company's credit facilities, interest expense increased
$1.4 million. The average nominal interest rate applicable to borrowings
under these facilities during the first half was 6.07%.
The increased interest costs were offset by a $.3 million increase in
investment income, principally related to a higher average level of
interest-bearing cash equivalents during the first nine months of 1996 as
compared to the same period of 1995.
<PAGE>21
INCOME TAXES
The effective income tax rate (income taxes expressed as a percentage of
pre-tax income) was 35.9% and 32.6% for the nine months ended September 30,
1996 and 1995, respectively. The effective rate for the 1996 period is higher
than the federal statutory rate due principally to the effect of state and
local income taxes; however, the effect of state and local income taxes has
been offset in part by the effect of the Company's expensing, during 1996 for
tax purposes, certain intangible assets related to the abandonment of certain
of the Company's domestic property and casualty risk information services
activities. The effective rate for 1995 was significantly lower than the
federal statutory rate due principally to goodwill, deducted for tax purposes,
relating to the sale of the Company's Health Insurance Systems Division.
<PAGE>22
LIQUIDITY AND CAPITAL RESOURCES
September 30, December 31,
1996 1995
Cash and equivalents, marketable (Dollars in Millions)
securities, and investments......... $ 16.9 $ 44.6
Current assets........................ 160.7 188.6
Current liabilities................... 71.2 94.4
Working capital....................... 89.5 94.2
Long-term debt........................ 57.7 14.9
Nine months Nine months
ended ended
September 30, September 30,
1996 1995
(Dollars in Millions)
Cash provided by operations........... $ 69.2 $ 70.7
Cash used for investing activities.... (69.3) (55.5)
Cash used for financing activities.... (26.5) 23.6
The Company's current ratio (current assets divided by current liabilities)
stood at 2.3 at September 30, 1996, which management believes is sufficient
when combined with the available credit facilities to provide for day-to-day
operating needs and the flexibility to take advantage of investment
opportunities. The Company has available under its credit facilities (net of
amounts outstanding at September 30, 1996) $100.0 million under its 364 day
$100.0 million facility and $43.0 million under its 3 year $100.0 million
facility, should management choose debt financing for any of the Company's
operating, investing or financing activities. Also, the Company has available
an uncommitted $10.0 million operating line of credit with which it may choose
to fund temporary operating cash needs.
Cash provided by operations decreased $1.5 million from September 30, 1995 to
September 30, 1996. During the first nine months of 1996, the Company paid a
significant amount of costs previously accrued in 1995 related to its ongoing
legal proceedings. In the third quarter of 1996 the Company made a cash
payment of $3.1 million relating to a 1995 business acquisition. Additionally,
the Company made cash payments of $6.8 million against its restructuring
reserves, as well as other accrued items in the normal course of business.
<PAGE>23
During the nine months ended September 30, 1996 the Company capitalized $42.0
million principally related to the development of its Series III client/server
property and casualty software (including the incorporation of object-oriented
technology and support for Microsoft Windows) and CyberLife object-oriented
client/server life insurance software, as well as other ongoing projects for
other domestic as well as international products. Also, during the second
quarter of 1996, the Company repurchased 1.4 million of its outstanding
common shares at an aggregate cost of $73.6 million.
Significant expenditures anticipated for the remainder of 1996, excluding any
possible business acquisitions or common share repurchases, are as follows:
acquisition of data processing, communications equipment and office furniture,
fixtures and equipment ($7.0 million); costs relating to the internal
development of software systems ($15.0 million); and payments relating to past
business acquisitions ($3.1 million).
The Company has historically used the cash generated from operations for the
following: development and acquisition of new products, acquisition of
businesses and repurchase of the Company's stock. The Company anticipates that
it will continue to use its cash for all of these purposes in the future and
that projected cash from operations, cash and investment reserves along with
amounts available under the Company's debt facilities will be sufficient to
meet presently anticipated operating needs and to accomplish specific
objectives in these areas and for other general corporate purposes.
<PAGE>24
FACTORS THAT MAY AFFECT FUTURE RESULTS
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;
- - There is increasing competition for the Company's products and services;
- - The market for the Company's products and services is characterized by rapid
changes in technology;
- - 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;
- - 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;
- - The Company's operations have not proven to be significantly seasonal,
although quarterly revenues and net income could be expected to vary at
times;
- - 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 operation expenses.
- - Many of the Company's current and potential customers are or will spend
significant amounts of money to make their existing information systems
capable of handling the year 2000.
<PAGE>25
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. Changes in the status of certain matters or facts or circumstances
underlying these estimates could result in material changes in these estimates,
and actual results could differ from these estimates.
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.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995:Statements in this 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 the Company's fillings with the Securities
and Exchange Commission. These and other factors may cause actual results to
differ materially from those anticipated.
<PAGE>26
<PAGE>
PART II
OTHER INFORMATION
POLICY MANAGEMENT SYSTEMS CORPORATION
Item 1. Legal Proceedings
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 is involved in a lawsuit with Security Life of Denver ("SLD")
alleging, among other things, breach of a life insurance joint development
contract. The Company is also presently involved in litigation with Liberty
Life Insurance Company arising out of the Company's change in the direction of
its future life software systems development following the acquisition of
CYBERTEK. The Company has asserted various affirmative defenses, claims and
counterclaims and is vigorously pursuing prompt resolutions of these matters
through all available legal processes (see Item 3, Legal Proceedings, of
Part I contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995).
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 (see Item 3, Legal Proceedings, of Part I contained in
the Company's Annual Report on Form 10-K for the year ended December 31, 1995).
In May 1996, after nine weeks of trial, the parties agreed that CSAA would
dismiss its claim against the Company in return for the Company dismissing its
counterclaim against CSAA. The agreement also resolves a collateral proceeding
by the Company against CSAA and Computer Sciences Corporation which is pending
in another jurisdiction and arose out of the agreement which was the basis of
the California proceeding.
Based upon the allegations raised in the CSAA and SLD lawsuits, the Company's
insurer, St. Paul Mercury Insurance Company ("St. Paul"), commenced a
declaratory judgment action against the Company to determine St. Paul's
obligation for defense costs and to indemnify the Company for any payment
related to these claims. The Company filed a counterclaim against St. Paul
seeking 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 (see Item 3, Legal Proceedings, of Part I contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995).
<PAGE>27
In connection with the Company reaching an agreement with CSAA for the
dismissal of the CSAA matter, St. Paul and the Company agreed to dismiss with
prejudice all claims against each other with respect to the CSAA matter, and
St. Paul agreed to reimburse the Company the Company's legal fees in the CSAA
matter (in excess of its deductible) with interest. As a result of this
recovery, the Company recorded a gain of $9.4 million in the second quarter of
1996. This agreement resolves the Company's and St. Paul's claims related to
the CSAA matter; however, the action will continue as to the parties' claims
related to insurance coverage for the SLD matter.
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 is vigorously pursuing prompt resolutions of these matters
through all available legal processes.
Items 2, 3, 4, and 5 are not applicable
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
Exhibits required to be filed with this Quarterly Report on Form 10-Q are
listed in the following Exhibit Index.
Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 1996.
<PAGE>28
POLICY MANAGEMENT SYSTEMS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POLICY MANAGEMENT SYSTEMS CORPORATION
(Registrant)
Date: November 14 , 1996 By: Timothy V. Williams
Executive Vice President
(Chief Financial Officer)
<PAGE>29
Policy Management Systems Corporation
Exhibit Index
Exhibit
Number
10. MATERIAL CONTRACTS
A. Amendment No.3 to 364-Day Credit Agreement dated August 9, 1996 among
Policy Management Systems Corporation and Morgan Guaranty Trust Company
of New York.
11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
27. FINANCIAL DATA SCHEDULE
<PAGE>1
[EXECUTION COPY]
AMENDMENT NO. 3 TO 364-DAYCREDIT AGREEMENT
AMENDMENT No. 3 dated as of August 9, 1996 among POLICY
MANAGEMENT SYSTEMS CORPORATION (the "Borrower"), the BANKS listed
on the signature pages hereof and MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, as Agent.
W I T N E S S E T H :
WHEREAS, the parties hereto have heretofore entered into a
364-Day Credit Agreement dated as of August 11, 1995 (as amended,
the "Agreement"); and
WHEREAS, the Borrower has asked the Banks, and the Banks are
willing, on the terms and conditions set forth below, to amend the
Agreement as set forth herein;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions. Unless otherwise specifically
defined herein, each term used herein that is defined in the
Agreement shall have the meaning assigned to such term in the
Agreement. Each reference to "hereof", "hereunder", "herein" and
"hereby" and each other similar reference and each reference to
"this Agreement" and each other similar reference contained in the
Agreement shall from and after the date hereof refer to the
Agreement as amended hereby.
SECTION 2. Amendment of the Definition of Debt. The
definition of "Debt" set forth in Section 1.1 of the Agreement is
amended to read in its entirety as follows: "Debt" of any Person
means at any date, without duplication, (i) all obligations of
such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar
instruments, (iii) all obligations of such Person to pay the
deferred purchase price of property or services, except (x) trade
accounts payable arising in the ordinary course of business, (y)
any other accrued expenses incurred in the ordinary course of
<PAGE>2
business and (z) payment of amounts pursuant to "contingent
earn-out" or similar provisions the payment of which amounts is
contingent upon the achievement of good faith performance targets,
but only to the extent that such payment is not, or would not be
reflected as, a liability on the balance sheet of such Person at
such date, (iv) all obligations of such Person as lessee which are
capitalized in accordance with generally accepted accounting
principles, (v) all non-contingent obligations (and, for purposes
of Section 5.9 (a), (f) and (k) and the definitions of Material
Debt and Material Financial Obligations, all contingent
obligations) of such Person to reimburse any bank or other Person
in respect of amounts paid under a letter of credit, (vi) all
obligations of such Person with respect to Designated Swaps, but
only to the extent that such obligations are, or would be
reflected as, a liability on the balance sheet of such Person at
such date, (vii) all Debt secured by a Lien on any asset of such
Person, whether or not such Debt is otherwise an obligation of
such Person and (viii) all Debt of others Guaranteed by such
Person. It is understood that the payment obligations of the
Borrower to a counterparty under any equity swap (each such swap,
a "Designated Swap") to be entered into between it and the
Borrower with respect to shares of outstanding common stock of the
Borrower in connection with the Borrower's share repurchase
program shall not constitute "Debt" except as set forth in clause
(vi) of the definition of Debt.
SECTION 3. Extension of the Termination Date. The
definition of "Termination Date" contained in Section 1.1 of the
Agreement is amended by substituting the date "August 8, 1997" for
the date "August 9, 1996" set forth therein.
SECTION 4. Additional Permitted Temporary Cash Investments.
The definition of "Temporary Cash Investments" set forth in
Section 1.1 of the Agreement is amended to read in its entirety as
follows:
"Temporary Cash Investment" means any Investment in
(i) direct obligations of the United States or any agency thereof
or the Commonwealth of Australia, or obligations guaranteed by the
United States or any agency thereof or the Commonwealth of
Australia, (ii) commercial paper rated at least A-1 by Standard &
Poor's Rating Group and P-1 by Moody's Investors Service, Inc.,
(iii) time deposits with, including certificates of deposit issued
by, any office located in the United States of (x) any Bank or (y)
any bank or trust company which is organized under the laws of the
United States or any state thereof or the United Kingdom and has
capital, surplus and undivided profits aggregating at least
$750,000,000, (iv) repurchase agreements with respect to
securities described in clause (i) above entered into with an
office of a bank or trust company meeting the criteria specified
<PAGE>3
in clause (iii) above, (v) municipal bonds issued by
municipalities located in the United States rated at least A or
the equivalent thereof by Standard & Poor's Rating Group or A2 or
the equivalent thereof by Moody's Investors Service, Inc. and, if
such bonds are rated by both such agencies, then at least A or the
equivalent thereof by Standard & Poor's Rating Group and A2 or the
equivalent thereof by Moody's Investors Service, Inc. and (vi)
Debt securities of any Person which are rated at least A or the
equivalent thereof by Standard & Poor's Rating Group or A2 or the
equivalent thereof by Moody's Investors Service, Inc. and, if such
Debt securities are rated by both such agencies, then at least A
or the equivalent thereof by Standard & Poor's Rating Group and A2
or the equivalent thereof by Moody's Investors Service, Inc.;
provided that any Investment described in clauses (i), (ii), (iii)
or (iv) matures within one year from the date of acquisition
thereof by the Borrower or a Subsidiary and any Investment
described in clause (vi) matures within 90 days from the date of
acquisition thereof by the Borrower or a Subsidiary.
SECTION 5. Increase in Amount of Certain Permitted
Subsidiary Debt. The proviso in clause (c) of Section 5.10 of the
Agreement is amended to read in its entirety as follows: "provided
that the aggregate principal amount of Debt of each such wholly-owned
Subsidiary outstanding at any time and permitted by this
clause (c) (net of the aggregate amount of Debt owed to such
wholly-owned Subsidiary by the Borrower or any other wholly-owned
Subsidiary) does not exceed $15,000,000. For purposes of this
clause (c), (1) the "Debt" owed by any wholly-owned Subsidiary
shall include, subject to clause (3) below, any intercompany loans
of or advances made to such Subsidiary and regardless of whether
such loans or advances constitute "Debt" as defined in Section
1.1, intercompany accounts payable of such Subsidiary or
otherwise, (2) the "Debt" owed to any wholly-owned Subsidiary
shall include any amounts payable to such Subsidiary with respect
to intercompany loans or advances made by such Subsidiary and
regardless of whether such payments constitute intercompany
accounts receivables of such Subsidiary or otherwise and (3) the
"Debt" of a Subsidiary of the Borrower shall not include an amount
up to 8,000,000 Australian Dollars owed by such Subsidiary to the
Borrower and incurred by such Subsidiary solely for the purpose of
consummating the acquisition of certain assets of Co-Cam Pty Ltd.,
Co-Cam Wholesale Pty Ltd., Co-Cam Asia Pty Ltd., Co-Cam Financial
Systems Pty Ltd., Co-Cam Custom Software Pty Ltd., and Auz-Com
Technologies Pty Ltd., each an Australian corporation, Co-Cam New
Zealand Ltd., a New Zealand corporation, and Co-Cam Computer
Services (UK) Ltd., a United Kingdom corporation.
SECTION 6. Increase in Minimum Cash Flow Ratio. Section
5.11 of the Agreement is amended by substituting the ratio ".4:1"
for the ratio ".25:1" set forth therein.
SECTION 7. Increase in Minimum Consolidated Tangible Net
Worth. Section 5.13 of the Agreement is amended by substituting
the amount "$175,000,000" for the amount "$162,500,000" set forth
in the first sentence thereof.
<PAGE>4
SECTION 8. Increase in Amount of Certain Permitted
Investments. Clauses (c) and (d) of Section 5.15 of the Agreement
are amended to read in their entirety as follows:
"(c) Investments in any customer of the Borrower or any of
its Subsidiaries (or in any other Person the accounts of which
would be consolidated with those of such customer in such
customer's consolidated financial statements if such statements
were prepared as of the date such Investments are made) which are
characterized as "inducements" and are made in connection with
long term processing contracts entered into by the Borrower or
such Subsidiary with such customer; and
(d) any Investment not otherwise permitted by the foregoing
clauses of this Section if, immediately after such Investment is
made or acquired, the aggregate net book value of all Investments
permitted by this clause (d) and outstanding at such time does not
exceed $40,000,000.".
SECTION 9. Substitution of Banks. A new Section 8.6 to the
Agreement is added immediately after Section 8.5 thereof, to read
in its entirety as follows:
SECTION 8.6. Substitution of Bank. If (i) the obligation of
any Bank to make Euro-Dollar Loans has been suspended pursuant to
Section 8.2 or (ii) any Bank has demanded compensation under
Section 8.3 or 8.4, the Borrower shall have the right, with the
assistance of the Agent, to seek a mutually satisfactory
substitute bank or banks (which may be one or more of the Banks)
to purchase the Note and assume the Commitment of such Bank.
SECTION 10. New Pricing Schedule. The Pricing Schedule to
the Agreement is amended to read in its entirety as set forth on
the Pricing Schedule attached hereto.
SECTION 11. Release of Guarantor. Effective as of the date
hereof, Policy Management Systems Canada, Ltd. shall cease to be a
"Guarantor" under the Agreement and shall be released from all of
its obligations thereunder.
SECTION 12. Counterparts; Effectiveness. This Amendment
may be signed in any number of counterparts, each of which shall
be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument. This Amendment shall
become effective as of August 9, 1996 upon receipt by the Agent of
duly executed counterparts hereof signed by the Borrower and the
Banks.
<PAGE>5<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed as of the date first above written.
POLICY MANAGEMENT SYSTEMS CORPORATION,
POLICY MANAGEMENT SYSTEMS CANADA, LTD.
CYBERTEK CORPORATION,
POLICY MANAGEMENT SYSTEMS
INTERNATIONAL.LTD.PMSI, L.P.
By POLICY MANAGEMENT SYSTEMS CORPORATION;
its General Partner
CYBERTEK SOLUTIONS, L.P.
By POLICY MANAGEMENT SYSTEMS CORPORATION;
its General Partner
By _________________________
Name:
Title:
POLICY MANAGEMENT SYSTEMS INVESTMENTS,INC.
By _________________________
Name:
Title:
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
By _________________________
Name:
Title:
<PAGE>6
FIRST UNION NATIONAL BANK OF SOUTH
CAROLINA
By ____________________
Name:
Title:
WACHOVIA BANK OF SOUTH CAROLINA, N.A.
By _____________________
Name:
Title:
BANK OF AMERICA ILLINOIS
By ____________________
Name:
Title:
COMMERZBANK AKTIENGESELLSCHAFT,
ATLANTA AGENCY
By _________________________
Name:
Title:
By _________________________
Name:
Title:
<PAGE>7
THE DAI-ICHI KANGYO BANK LTD., ATLANTA
AGENCY
By _________________________
Name:
Title:
NBD BANK
By _____________________
Name:
Title:
DEUTSCHE BANK AG NEW YORK AND/OR
CAYMAN ISLANDS BRANCHES
By_________________________
Name:
Title:
By _________________________
Name:
Title:
THE FUJI BANK, LIMITED, ATLANTA AGENCY
By _________________________
Name:
Title:
<PAGE>8<PAGE>
PRICING SCHEDULE
Each of "Euro-Dollar Margin", "CD Margin" and
"Facility Fee Rate" means, for any date, the rates set forth below
in the row opposite such term and the Usage on such date and in
the column corresponding to "Level I":
Level I
CD Margin
Usage <
Usage >OR=
0.5375%
0.6375%
Euro-Dollar
Margin
Usage <
Usage >OR=
0.4125%
0.5125%
Facility Fee
Rate
0.1875%
For purposes of this Schedule, the
following terms have the following meanings:
"Level I Pricing" applies at any date.
"Usage" means at any date a fraction (i) the
numerator of which is the aggregate outstanding principal amount
of the Loans at such date, after giving effect to any borrowing or
payment on such date, and (ii) the denominator of which is the
aggregate amount of the Commitments at such date, after giving
effect to any reduction of the Commitments on such date. For
purposes of this Schedule, if for any reason any Loans remain
outstanding after termination of the Commitments, the Usage for
each date on or after the date of such termination shall be deemed
to be greater than .
<PAGE>9
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed as of the date first above
written.
POLICY MANAGEMENT SYSTEMS CORPORATION,
POLICY MANAGEMENT SYSTEMS CANADA, LTD.
CYBERTEK CORPORATION
POLICY MANAGEMENT SYSTEMS INTERNATIONAL,
LTD. PMSI, L.P.
By POLICY MANAGEMENT SYSTEMS CORPORATION;
its General Partner
CYBERTEK SOLUTIONS, L.P.
By POLICY MANAGEMENT SYSTEMS CORPORATION;
its General Partner
By ______________________
Name:
Title:
POLICY MANAGEMENT SYSTEMS INVESTMENTS,INC.
By ______________________
Name:
Title:
<PAGE>10
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By ______________________
Name:
Title:
FIRST UNION NATIONAL BANK OF SOUTH
CAROLINA
By ______________________
Name:
Title:
WACHOVIA BANK OF SOUTH CAROLINA, N.A.
By ______________________
Name:
Title:
BANK OF AMERICA ILLINOIS
By ______________________
Name:
Title:
<PAGE>11
COMMERZBANK AKTIENGESELLSCHAFT,
ATLANTA AGENCY
By ______________________
Name:
Title:
By ______________________
Name:
Title:
THE DAI-ICHI KANGYO BANK LTD., ATLANTA AGENCY
By ______________________
Name:
Title:
NBD BANK
By ______________________
Name:
Title:
<PAGE>12
DEUTSCHE BANK AG NEW YORK AND/OR CAYMAN
ISLANDS BRANCHES
By ______________________
Name:
Title:
By ______________________
Name:
Title:
THE FUJI BANK, LIMITED, ATLANTA AGENCY
By ______________________
Name:
Title:
<TABLE>
<CAPTION>
Exhibit 11
Statement Regarding Computation of Per Share Earnings
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Primary net income per share
Net income:
Net income as reported $ 9,007 $11,594 $36,438 $35,004
Weighted average number
of common shares outstanding 18,179 19,401 18,747 19,376
Common stock equivalents
- - - -
Primary shares 18,179 19,401 18,747 19,376
Primary net income per share $ .50 .60 1.94 1.81
Fully diluted net income per share
Net income as reported $ 9,007 $11,594 $36,438 $35,004
Weighted average number
of common shares outstanding 18,179 19,401 18,747 19,376
Common stock equivalents 107 403 744 931
Fully diluted shares 18,286 19,804 19,491 20,307
Fully diluted net income per share $ .49 .59 1.87 1.72
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS OF POLICY
MANAGEMENT SYSTEMS CORPORATION AS OF AND FOR THE NINE MONTHS ENDED SEPT 30, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 8030
<SECURITIES> 2400
<RECEIVABLES> 103743
<ALLOWANCES> 806
<INVENTORY> 0
<CURRENT-ASSETS> 160708
<PP&E> 230093
<DEPRECIATION> 116589
<TOTAL-ASSETS> 548372
<CURRENT-LIABILITIES> 71159
<BONDS> 57750
0
0
<COMMON> 182
<OTHER-SE> 351136
<TOTAL-LIABILITY-AND-EQUITY> 548372
<SALES> 417513
<TOTAL-REVENUES> 417513
<CGS> 0
<TOTAL-COSTS> 359066
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3544
<INCOME-PRETAX> 56801
<INCOME-TAX> 20363
<INCOME-CONTINUING> 36438
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36438
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.94
</TABLE>
