<PAGE>1
UNITED STATES
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, 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 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
Title of each class on which registered
Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes 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 $783,498,105 at March 24, 1997 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 24, 1997 was 18,179,401.
DOCUMENTS INCORPORATED BY REFERENCE
Specified sections of the registrant's 1997 Proxy Statement in connection with
its 1997 Annual Meeting of Stockholders are incorporated by reference in Part
III hereof.
<PAGE>2
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 expanded geographically into Europe, Australia and Asia, as well
as into the life and health insurance markets, the information services market
and the financial 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 and financial services providers. 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 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 27 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 outsourcing and development center
for the Company's Nordic life systems. In December 1994, the Company acquired
London, England-based Creative Holdings Group, Limited ("Creative"), to
strengthen 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 research on 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 8 in 1996, 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, expanded functionality, object-oriented technology,
internet capability 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. From its inception, Series III was designed to
be year 2000 compliant and Series II products have been enhanced with the
capability of handling transactions with dates of the year 2000 and beyond.
The POINT System, the Company's midrange solution for the United States and
Latin American property and casualty insurance markets, is being re-engineered
to produce client/server capabilities featuring a graphical user interface
client. The re-engineered Point System, internally known as Point Open, will
utilize object-oriented technology and will be offered on multiple platforms.
Insure/90, an AS/400 based product, became part of the Company's general
insurance software solution to the European, Australian and Pacific Region
markets. Currently under development is Insure Plus, the next generation of
applications to ultimately replace the Insure/90 product, which will increase
functionality and offer client/server capabilities and object-oriented
technology.
<PAGE>2
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. The
Company's subsequent releases of CyberLife's scalable platforms include server
processes capable of processing on a PC local area network or an IBM Mainframe
Hardware, and client processes executing on Windows 3.1, Windows 95, Windows
NT, or OS/2. Cyberlife is also capable of processing transactions for the year
2000 and beyond.
Strategic Alliances
To expand its software product and services offerings, the Company has formed
certain strategic alliances. For example, the Company's initial 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 and S/390 business computer systems 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. 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, 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.
Information Technology Outsourcing and Business Process Outsourcing
The Company provides outsourcing services to the insurance industry using its
data center operations, technical personnel, business analysts, and insurance
specialists.
As an extension of traditional information technology ("IT") outsourcing, the
Company offers Business Process Outsourcing ("BPO") within all segments of the
Property and Casualty, Life, and Financial Services industry. BPO is the third
party management, operation, and/or ownership of a customer's insurance
related internal business processes. It transcends systems outsourcing and
management by offering much more than data center operations, network
management, and application support. By combining advanced technologies with
re-engineered workflows, the Company is able to bring an increased level of
efficiency to business processes. Entrusting these processes to the Company
allows customers to take advantage of these efficiencies and focus resources
on core competencies.
The Company provides various IT 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 provide information 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 continues to enhance
and integrate the business functions of CYBERTEK products with certain
components of the Company's
Series III industry applications.
In 1993, the Company acquired Vital Data 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 the Nordic market for individual life, group life and
pensions, and began researching the integration of these systems with Series
III.
To further strengthen its position in Europe and other foreign markets, the
Company acquired Creative in December 1994 and micado in October 1995.
Creative 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 Region, 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.
In October 1996, the Company acquired certain assets of Co-Cam Pty Ltd.,
headquartered in Melbourne, Australia as a means to further strengthen its
presence in the Pacific Region marketplace.
<PAGE>3
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 18.7% of total revenues in
1996. 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 8.9% of total revenues in 1996, compared to 16.4%
in 1985.
Segment Information
The Company has elected to revise its segment information in order to disclose
disaggregated information based on operating revenue producing business units
for which financial information is produced internally for operating
decisions. All prior year periods have been adjusted to reflect the revised
classifications.
The Company's five operating units are as follows:
1. Property and casualty enterprise software and services (generally referred
to as the "domestic property and casualty business"). This unit provides
software products, product support, professional services and outsourcing to
the US property and casualty insurance market.
2. Life enterprise software and services (generally referred to as the
"domestic life business"). This unit provides software products, product
support, professional services and outsourcing to the US life insurance and
financial services markets. Additionally in 1995 and 1994 this segment
included the Company's Health division which was sold in June 1995.
3. International. This unit provides software products, product support,
professional services, outsourcing and information services to the property
and casualty and life insurance markets primarily in Canada, Europe and the
Pacific Region.
4. Property and casualty information services. This unit provides information
services, principally motor vehicle records and claims histories, to US
property and casualty insurers.
5. Life information services. This unit provides information services,
principally physician reports and medical histories to US life insurers.
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 27 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.
<TABLE>
<CAPTION>
Percent of Revenue
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
United States 75.4% 77.5% 86.0%
Canada 3.4% 3.7% 3.4%
Europe 14.9% 13.2% 6.5%
Pacific Region 6.3% 5.6% 4.3%
Additional information required by this section is contained in Note 13
Segment Information, which appears on page 42 of the Company's Financial
Statements contained herein.
<PAGE>4
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 incorporate Microsoft's
major operating systems (Windows NT and Windows 95) and to incorporate
object-oriented and Internet-enabled technology (see Product Development).
The Company's software products automate most insurance processing functions,
including various underwriting, claims, accounting, financial reporting,
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 Company's applications will
operate on either a stand-alone basis or in conjunction with other
applications in the same product group.
Client/server technologies serve as a platform for the Company's systems for
the property and casualty and life insurance markets. A primary advantage 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, are capable of
processing 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 allow system
upgrades, additions and interfaces to be implemented more quickly and at
reduced costs, with minimum disruption to ongoing operations, and which
utilize current technological advances.
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 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.
Product Support and Services
Product Support
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.
Professional Services
The Company provides professional consulting and other services on a
time and material basis and in some circumstances under fixed-price
arrangements, including needs analysis, consulting, implementation, project
management and programming. In addition the Company provides a full range of
training programs to allow customers to gain an understanding of the
utilization and functionality of the products and technology.
IT Outsourcing and BPO Services
The Company offers IT 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 the
Florida Joint Underwriters' Association and the 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. IT
outsourcing services are typically provided under contracts having terms from
three to ten years.
The Company also offers related BPO services within all segments of the
Property and Casualty, Life, and Financial Services industry.
<PAGE>5
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 records), 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 Series III for property and casualty and CyberLife for the life and
financial services industry (see Software Products above).
Although development efforts for the full release of Series III for the
property and casualty insurance industry will continue, the majority of the
components of Series III have been delivered since research began in 1987.
With the completion of Release 8 in 1996, Series III, with the exception of
workers' compensation insurance, offers a comprehensive solution to the
property and casualty industry worldwide. The Company has adopted
object-oriented technology for current and future application development. As such,
it is the Company's goal that every new development project uses the same
technology and same architecture to create new insurance objects. This will
enable the Company's General & Life Object-Based Application Library (GLOBAL)
to provide a repository of insurance application objects. Series III Release 9
will incorporate object-oriented technology. Release 9 will also support, for
the first time in Series III, Microsoft's Windows NT operating systems.
The Company is undertaking a new strategic initiative which establishes a
pathway for customers to migrate from mainframe-based legacy systems to open,
Internet-enabled client/server solutions. Often the gap between the technology
that customers need and their current technology is so wide that bridging the
gap is a major obstacle and risk. By breaking technology upgrades into
manageable units, the initiative allows customers to gradually improve their
processing capabilities.
The development of CyberLife has represented a significant investment for the
Company. Beginning with the existing functionality of the Cybertek enterprise
solutions, this development has involved creating a new architecture and
expanding those capabilities employing object-oriented development techniques
and other leading-edge technologies to create a client/server enterprise-wide
system for the life insurance and financial services industry. CyberLife's
underlying technologies include expert systems, relational databases, real-time
processing, and multi-platform implementations. The system is designed to
be scalable from IBM mainframes to LAN server platforms. The client desktop
functions under the Microsoft Windows 3.1, Windows 95, and Windows NT 4.0
operating systems as well as IBM's OS/2.
As part of this development effort and consistent with the Company's desire to
reuse its software assets, a number of the Company's other products, including
the Client Information System, DecisionWise, the Document Automation Platform,
and the Electronic Commerce Platform, are being integrated into CyberLife.
This will obviate the need to develop similar functionality. Future CyberLife
development will also include participation in the Company's GLOBAL effort to
create re-usable insurance application objects.
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 has nearly completed 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 $56.8, $46.8 and
$30.7 million in 1996, 1995, and 1994, respectively, representing 9.7%, 8.7%
and 6.2%, 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 intends to continue to expand its product and services offerings
through internal development and acquisitions.
<PAGE>6
Marketing and Customers
The Company primarily 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 over 30 foreign countries.
At December 31, 1996, the Company was providing its products and services to
more than 9,500 insurance companies, agents and adjusters. No single customer
accounted for more than 10% of revenues during the year ended December 31,
1996.
The Company markets its products and services through a staff of approximately
165 employees, including salespeople and marketing support personnel, most of
whom are specialists in the insurance industry and information technology.
The Company's marketing force works extensively with each prospective
customer, to assist in analyzing its specific requirements. Consequently, the
marketing process may extend over several months for a prospective customer
seeking a major automation based 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, 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 secrets 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 owns numerous trademarks and service marks which are used in
connection with its business in all segments. These trademarks are important
to its business. Depending upon the jurisdiction, trademarks are valid as long
as they are in use and/or their registrations are properly maintained and they
have not been found to have become generic. Registrations of trademarks can
generally be renewed indefinitely as long as the trademarks are in use.
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 service, software
and outsourcing companies, consulting firms, computer manufacturers, 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, 1996, the Company had 4,906 full-time employees and 5,133
total employees located in offices worldwide.
<PAGE>7
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 27 various
locations domestically for its regional and branch offices throughout the
United States. Internationally, the Company has 25 locations throughout
Canada, Central and South America, Europe and the Pacific Region.
The Company, through its data centers located in North America, Europe and
Australia, utilizes 20 mid-range and mainframe computers. All computers are
owned or held under short-term leases. In total, these computers have over
10,000 megabytes of memory and are capable of processing over 950 million
instructions per second. The Company is currently utilizing 80% to 90% of
this capacity.
Item 3. 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 the Company's securities. The SEC has issued a formal order of
investigation which provides the SEC staff with power to subpoena documents
and to compel testimony in connection with their investigation. The Company is
cooperating with this investigation.
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 trade practices, and fraud. SLD sought direct, indirect, consequential,
and punitive damages in excess of $80 million. In February of 1997 following a
jury trial, the Court and jury entered judgment in favor of the Company
against SLD on the claims of fraud and unfair trade practices. A verdict and
judgment was returned against the Company for breach of contract and damages
of $3.5 million, together with pre-judgment interest. In addition the jury
found that SLD was using the Company's trade secrets without permission.
Pending before the Court are the Company's request for a court order requiring
return of the Company's trade secrets and for SLD to cease further use of the
Company's systems, and the Company's motions for judgment notwithstanding
verdict. Depending on the outcome of the pending matters, the Company may
appeal the judgment to the United States Court of Appeals. As a result of this
judgment, the Company determined it was necessary to increase its estimate of
anticipated liability for the costs associated with these matters, and at
December 31, 1996, provided an additional $6.0 million for the estimated
judgment, interest, cost, and legal fees arising from this matter. Changes in
the status of this proceeding could result in a change in this estimate in
subsequent periods.
The Company is also presently involved in litigation which commenced in
January of 1996 in the Circuit Court in Greenville County, South Carolina with
Liberty Life Insurance Company and certain of its affiliates ("Liberty")
arising out of 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.
Liberty's complaint alleges breach of contract, breach of express and implied
warranties, fraudulent inducement, breach of contract accompanied by a
fraudulent act, and recission. Liberty 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 pursuing
counterclaims against Liberty for breach of contract, recoupment, breach of
good faith and fair dealing, and breach of contract accompanied by a
fraudulent act. The Company is seeking equitable relief, including injunctive
relief, and currently unspecified actual, compensatory and consequential
damages.
Based upon the allegations raised in a prior lawsuit with the California State
Automobile Association ("CSAA") and the SLD lawsuit, the Company's insurer,
St. Paul Mercury Insurance Company ("St. Paul"), commenced in June 1995 a
declaratory judgment action in the United States District Court for the
District of South Carolina 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.
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 resolved the Company's and St. Paul's claims related to
the CSAA matter. The action continues 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.
<PAGE>8
Item 4.
Executive Officers of the Registrant
Name Age Position
G. Larry Wilson 50 Chairman of the Board, President
and Chief Executive Officer
David T. Bailey 50 Executive Vice President
Paul R. Butare 45 Executive Vice President
Donald A. Coggiola 57 Executive Vice President
Stephen G. Morrison 47 Executive Vice President, Secretary, General
Counsel and Chief Administrative Officer
Timothy V. Williams 47 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.
Stephen G. Morrison - Executive Vice President, Secretary, General Counsel and
Chief Administrative Officer of the Company since January 1994. Responsible
for the administration of the legal affairs of the Company and the Corporate
Services Group. 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. 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.
Submission of Matters to a Vote of Security Holders
None.
<PAGE>9
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.
1996
High Low
First Quarter $53 3/4 $43 5/8
Second Quarter 55 1/2 43 7/8
Third Quarter 50 1/2 33 1/8
Fourth Quarter 47 3/8 34 1/8
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
Title of Class
Common Stock, $.01 par value
Number of Record Holders as of March 24, 1997
1,398
<PAGE>10
Item 6. Selected Consolidated Financial Data
</TABLE>
<TABLE>
<CAPTION>
(Restated)
Results of Operations 1996 1995 1994 1993 1992
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Revenues $581,909 $537,302 $492,706 $453,099 $489,261
Operating income (loss) 74,725 8,624 (19,745) (77,053) 78,971
Other income and
expenses, net (2,677) (543) 1,256 10,656 11,792
Income (loss) before
income taxes
(benefit) 72,048 8,081 (18,489) (66,397) 90,763
Net income (loss) $ 45,997 $ 3,139 $ (9,658) $(56,134) $ 61,522
Net income (loss)
per share $ 2.47 $ .16 $ (.46) $ (2.46) $ 2.65
Financial Condition
Cash and equivalents,
marketable securities
and investments $ 30,838 $ 44,614 $ 34,304 $156,772 $238,521
Current assets 173,034 165,593 167,725 287,737 343,913
Current liabilities 112,636 94,461 76,856 80,981 57,226
Working capital 60,398 71,132 90,869 206,756 286,687
Total assets 572,218 532,736 524,031 659,803 706,942
Long-term debt(excludes
current portion) 34,268 14,873 4,162 5,655 6,001
Total liabilities 208,966 150,064 147,109 182,831 127,866
Stockholders' equity 363,252 382,672 376,922 476,972 579,076
<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 1996, 1995 and 1994 reflect special charges.The
results of operations in 1996 reflect a net special credit of $3.4 million.
This credit is a result of a pre-tax gain of $9.4 million related to the
litigation recovery of previously established litigation reserves and a pre-tax
charge of $6.0 million related to other litigation. 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 $67.5 million
(after taxes $41.5 million or $1.99 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.
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 $2.7, $2.1 and $2.0 million for 1996, 1995 and 1994,
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 $5.3, $3.6 and $2.4 million for 1996, 1995 and 1994,
respectively.
See Quarterly Consolidated Results of Operations on page 44 and Note 12
of Notes to Consolidated Financial Statements on page 40.
</TABLE>
<PAGE>11
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 1996 1995
Year Ended December 31, vs vs
1996 1995 1994 1995 1994
<S>
Revenues: <C> <C> <C> <C> <C>
Licensing 18.7% 19.0% 18.1% 6.7% 14.6%
Services 81.3 81.0 81.9 8.7 7.8
100.0 100.0 100.0 8.3 9.1
Operating expenses:
Cost of revenues
Employee compensation
and benefits 31.4 29.7 30.0 14.8 7.7
Computer and communications
expenses 5.5 5.4 4.9 11.4 20.0
Information services and
data acquisition costs 20.2 21.1 26.9 3.6 (14.3)
Depreciation and
amortization of
property, equipment and
capitalized software
cost 8.4 9.2 9.6 (1.5) 4.8
Other costs and expenses 7.7 8.6 6.7 (3.8) 40.8
Selling, general and
administrative expenses 13.0 12.2 10.5 14.9 26.2
Amortization of goodwill and
other intangibles 1.8 1.7 1.8 11.8 7.8
Litigation settlement
and expenses, net (.6) 3.4 6.9 (118.0) (46.0)
Gain on sale of Health
business and related
assets - (1.5) - - -
Business acquisition
charges - .5 .5 - .9
Purchased research and
development - 2.7 - - -
Loss on disposition of data
processing equipment - 3.4 - - -
Impairment and restructuring
credits (charges), net (.2) 2.0 6.2 (110.3) (65.5)
87.2 98.4 104.0 (4.1) (3.2)
Operating income (loss) 12.8 1.6 (4.0) 766.5 143.7
Other income and
expenses, net (.4) (.1) .2 393.9 (143.2)
Income (loss) before income
taxes (benefit) 12.4 1.5 (3.8) 791.6 143.7
Income taxes (benefit) 4.5 .9 (1.8) 421.4 156.0
Net income (loss) 7.9% .6% (2.0)%1,374.3% 132.5%
</TABLE>
<PAGE>12
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 1996 Change 1995 Change 1994
(Dollars In Millions)
Initial charges $ 51.9 6.4% $ 48.8 28.1% $38.1
Monthly charges 57.0 6.9 53.3 4.5 51.0
$108.9 6.7% $102.1 14.6% $89.1
Percentage of revenues 18.7% 19.0% 18.1%
Initial license revenues for 1996 increased $3.1 million (6.4%) due
principally to an increase in domestic life insurance initial licensing
activity of $5.9 million. This increase was offset by a decrease of $2.7
million in domestic property and casualty insurance initial licensing.
However, initial license charges for 1995 included a $4.0 million non-recurring
source code license agreement with a cross-industry vendor and $4.8
million related to joint marketing and distribution arrangements with NCR
Corporation. These revenues were replaced, in part, by a large license of the
Company's Series II and Series III products executed during the fourth quarter
of 1996 for $6.2 million.
Initial license charges for 1996 include right-to-use charges (licenses
excluding further MESA obligations) of $4.2 million compared to $5.6 million
(inclusive of the $4.0 million source code license referred to above) for
1995. Initial license charges for the year also include termination charges
(related to the buyout of monthly license charges) of $1.7 million and $3.5
million for 1996 and 1995, respectively.
Initial license revenues for 1995 increased $10.7 million (28.1%) due
principally to an increase in international property and casualty insurance
licensing activity of $13.3 million, which was largely attributable 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 $3.7 million for 1995. 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).
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 1996, 1995 and 1994:
Initial licensing 1996 1995 1994
(Dollars In Millions)
Property and Casualty (domestic) $20.1 $22.8 $19.1
Life (domestic) 14.9 9.0* 14.2*
International 16.9 17.0 4.8
$51.9 $48.8 $38.1
Percentage of total revenue 8.9% 9.1% 7.7%
*Includes initial licensing revenues from the Health Division (divested June
30, 1995) of $.3 million and $6.9 million in 1995 and 1994, respectively.
<PAGE>13
Monthly license charges for 1996 increased $3.7 million (6.9%) compared to
1995. This increase is principally related to an increase of $3.1 million in
licensing activities in the international segment due to the acquisitions of
Co-Cam in August 1996 and micado in October 1995. The domestic life monthly
licensing increased $1.2 million, excluding a $.5 million decline in the
health insurance systems business.
Monthly license charges for 1995 increased $2.3 million (4.5%) compared to
1994. This increase is principally related to an increase of $2.8 million in
international attributable to the acquisition of Creative and the Nordic
market and a $1.6 million increase associated with licensing activities in the
property and casualty domestic market. This increase was partially offset by
a $2.2 million decline in domestic life licensing activity, principally in the
health insurance systems business.
Services 1996 Change 1995 Change 1994
(Dollars In Millions)
Professional and outsourcing $310.4 19.0% $260.8 24.9% $208.8
Information 158.3 (8.1) 172.3 (10.8) 193.1
Other 4.3 104.8 2.1 23.5 1.7
$473.0 8.7% $435.2 7.8% $403.6
Percentage of revenues 81.3% 81.0% 81.9%
Professional and outsourcing services revenues for 1996 increased $49.6
million (19.0%) compared to 1995. This increase was principally related to
services from both new and existing contracts amounting to $22.2 million for
the domestic property and casualty insurance business and $6.6 million for
domestic life insurance business and $20.8 million for international. The
increase in the international market was principally due to the acquisitions
of Co-Cam at August 9, 1996, and micado at October 1, 1995, and new services
contracts in Europe.
Professional and outsourcing services revenues for 1995 increased $52.0
million (24.9%) compared to 1994. This increase was principally related to an
increase in new and existing contracts amounting to $23.8 million for property
and casualty insurance business and $4.6 million for life insurance business,
offset by a decrease in revenues from the health insurance division of $9.3
million. The domestic market produced an $11.8 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 $32.8 million was principally due to
the acquisition of Creative at December 31, 1994, and new services contracts
in Europe, Canada and the 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.
Information services revenues decreased $14.0 million (8.1%) from 1995 to
1996; however, excluding risk information services revenues (ceased and
abandoned in the fourth quarter 1995), information services revenues increased
$8.7 million (5.8%) principally related to an increase of $5.2 million in the
domestic property and casualty automobile information services business and an
increase of $4.0 million in life information services revenues.
Information services revenues decreased $20.8 million (10.8%) from 1994 to
1995, due principally to closing/divestiture of risk information services
resulting in a $21.8 million decrease in revenues. The decrease in risk
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).
The Company believes that the operational and financial characteristics of its
information services businesses differs substantially from its other business.
Additionally with the continuing changes in the availability of and access to
information the Company is evaluating the best way to provide information to
its customers and whether ownership of the data is critical to satisfying the
customer needs.
Operating Expenses
Cost of Revenues
Employee compensation and benefits increased $23.5 million (14.8%) for 1996
compared with 1995, and principally resulted from increased salaries and
related costs associated with the acquisition of Co-Cam in August 1996, micado
in October 1995 and increased costs associated with the growth in staffing for
additional professional and outsourcing services to new and existing
customers. Compensation and benefits increased $19.2 million internationally,
while domestic only increased $4.3 million. The increases in costs were
partially offset by a decrease in compensation and benefits of $19.3 million
resulting from the Company's divestitures of its health and risk information
services businesses in June 1995 and December 1995, respectively,(see Notes 11
and 12 of Notes to Consolidated Financial Statements), a decrease in
performance compensation expense and a decrease in the use of temporary
employees.
<PAGE>14
Employee compensation and benefits increased $11.5 million (7.7%) for 1995
compared with 1994, and principally resulted from the 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.
Computer and communications expenses increased $3.3 million (11.4%) for 1996
when compared to 1995, principally due to 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 systems 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. As a percentage
of professional and outsourcing revenues, computer and communications expenses
remained relatively constant at 10.3% for 1996, 11.1% for 1995 and 11.5% for
1994.
Computer and communications expenses increased $4.8 million (20.0%) to $28.8
million for 1995 compared to $24.0 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.
Information services and data acquisition costs increased $4.1 million (3.6%)
for 1996 compared to 1995, principally due to an increase in the volume of
expenses for attending physician statements related to the provision of
certain life insurance information services.
Information services and data acquisition costs decreased $18.9 million
(14.3%) for 1995 compared to 1994, principally due 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).
Although depreciation and amortization of property, equipment and capitalized
software costs decreased slightly from 1995 to 1996, amortization of
internally developed software costs increased $3.7 million (18.8%),
principally due to amortization associated with the March 1996 release of the
latest version of CyberLife client/server life insurance software and the 1996
release of the Company's property and casualty insurance Series III
client/server software systems.
Depreciation expense decreased by $4.7 million as a result of the 1995
restructuring of the Company's U.S. Data Center and subsequent lease of
computer equipment.
Depreciation and amortization expense increased $2.2 million (4.8%) for 1995
when compared to 1994. 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.
Other costs and expenses decreased 3.8% for 1996 compared to 1995. 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.
Other costs and expenses increased 40.8% for 1995 compared to 1994. This
increase resulted primarily from increased costs due to the December 1994
acquisition of Creative.
Selling, General and Administration
Selling, general and administrative expenses increased 14.9% for 1996
compared to 1995, almost entirely due to the Company's investment in its
international sales force and infrastructure.
Selling, general and administrative expenses increased 26.2% for 1995 compared
to 1994, principally due to the December 1994 acquisition of Creative and the
Company's investment in its international sales force and infrastructure.
These increases were offset in part by the divestiture of its health
information services business in June 1995.
Amortization
Amortization of goodwill and other intangibles increased 11.8% for 1996
compared to 1995, principally due to the result of amortization of intangible
assets related to the October 1995 acquisition of micado.
Amortization of goodwill and other intangibles increased 7.8% for 1995
compared to 1994, principally due to an increase in the amortization of
intangibles associated with the December 1994 acquisition of Creative.
<PAGE>15
Litigation Settlement and Expenses
Litigation settlement and expenses net, resulted in a net credit in May 1996
when the Company resolved its litigation with the California State Automobile
Association Inter-Insurance Bureau and the California State Automobile
Association ("CSAA"), concluding with an agreement for the mutual dismissal of
all related claims and counterclaims 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 pre-tax gain for this recovery
during the second quarter. Additionally, in February of 1997, the Company
determined it was necessary to increase its estimate of anticipated liability
for the costs associated with the verdict in the Security Life of Denver
Insurance Company (SLD) matter and as of December 31, 1996 recorded an
additional $6.0 million for the costs in this matter (see Note 8 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 those matters.
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 a shareholder class action. The Company's
portion of the settlement and associated litigation costs resulted in a
special charge of $34.2 million ($21.3 million after tax) in the fourth
quarter of 1994. 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.
Gain on Sale of Health Business
During the first half of 1993, the Company experienced a significant decrease
in revenues from its health insurance systems business. The Company evaluated
various options 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).
Business Acquisition Costs
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).
Purchased Research and Development
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 existed.
The Company expensed $2.6 million of purchased research and development,
related to the Creative acquisition, at December 31, 1994.
Loss on Disposition of Data Processing Equipment
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 two and four 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 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 charges, aggregating $18.4 million, are recorded under
Loss on disposition of data processing equipment for the year ended December
31, 1995.
Impairment and Restructuring Charges
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 ($3.7 million) and the costs
associated with the consolidation of existing operations with those of an
acquired business in Germany ($.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).
<PAGE>16
The Company recorded certain impairment and restructuring charges amounting to
$30.7 million for 1994. 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.
Operating Income
Operating income, after the effects of the litigation settlement, litigation
recovery and credit to impairment and restructuring expense, was $74.7 million
for the year ended December 31, 1996. In May 1996, the Company recorded a $9.4
million pre-tax gain for the recovery of legal expenses following the
resolution of the CSAA matter. During the year the Company also recorded a
$1.1 million credit to change estimates associated with previously established
restructuring reserves. At year end the Company recorded a $6.0 million pre-tax
charge following the judgment in the SLD matter.
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. These results included a gain from the sale of the Company's Health
Division of approximately $8.1 million. 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).
For 1994 the Company incurred an operating loss of $19.7 million. This loss
was solely attributable to various special charges aggregating $67.5 million,
as discussed above.
Excluding the gain, special charges and credit, operating income was $70.2
million for 1996, compared with $65.1 million for 1995 and $47.7 million for
1994. The consecutive increases in operating income from 1994 through 1996,
excluding the gain and special charges, results principally from aggregate
increases in initial license revenues from both property and casualty and life
insurers of $3.0 million from 1995 to 1996 and $10.8 million from 1994 to
1995, 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 $39.6
million from 1995 to 1996 and $51.3 million from 1994 to 1995, and from
increases in new professional and outsourcing services revenues from life
insurers of $17.0 million from 1995 to 1996 and $16.4 million from 1994 to
1995. Operating income, as a percentage of total revenues, excluding the
effects of the gain and special charges as described above, was 12.1% for
1996, 12.1% for 1995 and 9.7% for 1994.
Licensing revenues, as a percentage of total revenues, increased from 18.1% of
total revenues for 1994 to 19.0% for 1995 and decreased to 18.7% for 1996 (see
Revenues). If licensing revenues from the Company's health division (sold on
June 30, 1995) are excluded licensing revenues as a percentage of total
revenues increased from 16.9% for 1994 to 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)
1996 $10.4 $12.0 $10.1 $19.4 $ 51.9
Initial license revenues 20.1% 23.1% 19.4% 37.4% 100.0%
Total revenues 7.8% 8.8% 6.9% 11.8% 8.9%
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%
<PAGE>17
Revenues from professional and outsourcing services activities, as a function
of total revenues, increased from 42.3% for 1994 to 48.4% for 1995 and 53.3%
for 1996 (see Revenues). Excluding the effects of professional and outsourcing
services revenues from the Company's health division (sold on June 30, 1995),
professional and outsourcing revenues as a percentage of total revenues
increased from 39.5% for 1994 to 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 $18.6 million, primarily due to an aggregate operating loss of $21.8
million from the property and casualty information services segments. 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 $11.4 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 39.2% for 1994,
to 32.1% for 1995 and 27.2% for 1996.
Other Income and Expenses
During 1996, the Company made large cash expenditures relating to the October
1995 acquisition of micado ($6.4 million), the repurchase of 759,512 of the
1,519,024 shares of common stock held by GAP Coinvestment Partners and General
Atlantic Investors 14 L.P. ($38.0 million) in March 1996 and the repurchase of
645,500 shares of the Company's outstanding common stock on the open market
($35.6 million) under its 2.5 million share repurchase authorization in March
1996. Consequently, the Company maintained a higher level of debt and a lower
level of investable funds during 1996, resulting in an increase in interest
expense of $1.7 million and a decrease in investment income of $.4 million.
Investment income decreased $3.4 million for 1995 compared with 1994, as a
result of a lower level of investable funds, resulting from large cash
expenditures for the acquisition of Creative ($19.9 million) in December 1994
and the repurchase in May 1994 of 3,274,037 shares of the Company's common
stock ($91.9 million).
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 port-
folio. The Company incurred a loss on the sale of securities of $1.9 million
related directly to this liquidation during 1994.
Income taxes
The effective income tax (benefit) rate (income taxes expressed as a
percentage of pre-tax income) was 36.2%, 61.1% and (47.8%) for the years
ended December 31, 1996, 1995, and 1994, respectively. 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), nondeductible write-offs
of goodwill impairment (see Note 12 of Notes to Consolidated Financial
Statements) and the nondeductible amortization of goodwill. 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.
<PAGE>18
Liquidity and Capital Resources
December 31,
1996 1995
(In Millions)
Cash and equivalents,
marketable securities
and investments $ 30.8 $ 44.6
Current assets 173.0 165.6
Current liabilities 112.6 94.4
Working capital 60.4 71.2
Current portion of long-term debt 31.2 1.8
Long-term debt 34.3 14.9
Cash provided by operations 96.8 104.7
Cash (used) by investing activities (91.3) (98.6)
Cash (used) provided by financing activities (18.7) 10.8
The Company's current ratio (current assets divided by current liabilities)
stood at 1.5 at December 31, 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 December 31, 1996) $77.0 million under its 364 day
$100.0 million facility and $61.0 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 (see Cost and Expenses above and Note 8
of Notes to Consolidated Financial Statements).
Cash provided by operations decreased in 1996 as a result of several factors.
During the year the Company made a cash payment of $6.2 million relating to a
1995 business acquisition and $73.6 million resulting from the repurchase of
the Company's common stock. Additionally, the Company made cash payments of
$8.1 million against its restructuring reserves, as well as other accrued
items, in the normal course of business and paid significant amounts
previously accrued in 1995 related to its ongoing legal proceedings.
During 1996, the Company capitalized $56.8 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 the domestic as well as
international products.
Significant expenditures planned for 1997, 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 ($25.0 million) and
costs relating to the internal development of software systems ($59.0
million).
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 conditions, 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.
<PAGE>19
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.
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. The Company believes that
current and potential customers' decisions to enter into license agreements
with the Company, may be significantly affected by strategies to make their
existing information systems capable of handling the year 2000.
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.
Additionally, the Company has an outsourcing contract that, due to legislation
in 1996, has caused a portion of the revenue to shift to the last half of the
year.
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>20
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial
Statements and Supplementary Data
Page
Report of Independent Accountants 21
Consolidated Financial Statements and Notes:
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 22
Consolidated Balance Sheets as of
December 31, 1996 and 1995 23
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1996,
1995 and 1994 24
Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994 25
Notes to Consolidated Financial Statements 26
Quarterly Consolidated Results of Operations 44
Supplemental Schedules:
Schedule II - Valuation and Qualifying Accounts 45
Report of Independent Accountants 46
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>21
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 as of December 31, 1996 and 1995 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, 1996. 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, 1996 and
1995 and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Atlanta, Georgia
February 7, 1997
<PAGE>22
<TABLE>
Policy Management Systems Corporation
Consolidated Statements of Operations
<CAPTION>
Year Ended December 31,
1996 1995 1994
(In Thousands, Except Per
Share Data)
<S> <C> <C> <C>
Revenues:
Licensing $108,922 $102,092 $ 89,083
Services 472,987 435,210 403,623
581,909 537,302 492,706
Operating expenses:
Cost of revenues
Employee compensation and benefits 182,904 159,375 147,914
Computer and communications expenses 32,059 28,779 23,991
Information services and data
acquisition costs 117,630 113,536 132,484
Depreciation and amortization of
property,equipment and capitalized
software costs 48,594 49,327 47,068
Other costs and expenses 44,471 46,243 32,833
Selling, general and administrative
expenses 75,479 65,664 52,038
Amortization of goodwill and other
intangibles 10,426 9,328 8,650
Litigation settlement and expenses, net (3,422) 18,465 34,194
Gain on sale of Health business
and related assets - (8,139) -
Business acquisition charges 136 2,573 -
Purchased research and development - 14,500 2,551
Loss on disposition of data processing
equipment - 18,422 -
Impairment and restructuring credits
(charges), net (1,093) 10,605 30,728
507,184 528,678 512,451
Operating income (loss) 74,725 8,624 (19,745)
Other Income and Expenses:
Investment income 2,316 2,764 6,114
(Loss) gain on sale of marketable
securities - - (1,857)
Interest expense and other charges (4,993) (3,307) (3,001)
(2,677) (543) 1,256
Income (loss) before income
taxes (benefit) 72,048 8,081 (18,489)
Income taxes (benefit) 26,051 4,942 (8,831)
Net income (loss) $ 45,997 $ 3,139 $ (9,658)
Net income (loss) per share $ 2.47 $ .16 $ (.46)
<FN>
Weighted average number of shares 18,604 19,391 20,865
See accompanying notes.
</TABLE>
<PAGE>23
<TABLE>
Policy Management Systems Corporation
Consolidated Balance Sheets
<CAPTION>
December 31,
1996 1995
(In Thousands,
Except Share Data)
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 22,121 $ 35,094
Marketable securities 2,234 4,615
Receivables, net of allowance
for uncollectible amounts
of $883 ($2,042 at 1995) 116,113 95,740
Income tax receivable 1,383 2,050
Deferred income taxes 15,343 10,261
Other 15,840 17,833
Total current assets 173,034 165,593
Property and equipment, net 115,757 109,183
Receivables 4,866 5,885
Income tax receivable 4,041 4,041
Goodwill and other intangibles, net 83,363 89,319
Capitalized software costs, net 177,875 145,982
Deferred income taxes 1,560 2,336
Investments 6,483 4,905
Other 5,239 5,492
Total assets $572,218 $532,736
Liabilities
Current liabilities:
Accounts payable and accrued expenses $ 61,435 $ 70,589
Accrued restructuring charges 2,478 9,456
Accrued contract termination costs 407 1,154
Current portion of long-term debt 31,222 1,766
Income taxes payable 6,623 -
Unearned revenues 9,840 11,350
Other 631 146
Total current liabilities 112,636 94,461
Long-term debt 34,268 14,873
Deferred income taxes 58,370 33,652
Accrued restructuring charges 1,340 4,439
Other 2,352 2,639
Total liabilities 208,966 150,064
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,18,179,186 shares
issued and outstanding (19,436,114 at 1995) 182 194
Additional paid-in capital 106,104 173,402
Retained earnings 256,110 210,113
Foreign currency translation adjustment 856 (1,037)
Total stockholders' equity 363,252 382,672
Total liabilities and stockholders'
equity $572,218 $532,736
<FN>
See accompanying notes.
</TABLE>
<PAGE>24
<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, 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
Net income - - 45,997 - - 45,997
Stock options
exercised
(148,084 shares) 2 6,291 - - - 6,293
Repurchase of
1,405,012 shares
of common stock (14) (73,589) - - - (73,603)
Foreign currency
translation
adjustment - - - 1,893 - 1,893
Balance,
December 31, 1996 $182 $106,104 $256,110 $ 856 $ - $363,252
<FN>
See accompanying notes.
</TABLE>
<PAGE>25
<TABLE>
Policy Management Systems Corporation
Consolidated Statements of Cash Flows
<CAPTION>
Year Ended December 31,
1996 1995 1994
(In Thousands)
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 45,997 $ 3,139 $ (9,658)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation and amortization 62,265 60,700 58,813
Deferred income taxes 20,392 (21,692) (8,192)
Loss on sale of marketable securities - - 1,857
Provision for uncollectible accounts 510 567 955
Impairment charges - 6,756 33,089
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 (10,076) (1,713) (11,595)
Receivables (17,299) (5,901) 10,351
Income tax receivable 667 24,981 (12,299)
Accounts payable and accrued expenses (9,524) 16,911 2,241
Income taxes payable 4,805 (2,028) 1,104
Other, net (955) (12,540) (9,356)
Cash provided by operations 96,782 104,675 59,861
Investing Activities
Proceeds from sales/maturities of marketable
available-for-sale securities 2,050 25,000 341,250
Purchases of available-for-sale securities - (19,966)(228,313)
Proceeds from maturities of held-to-maturity
securities 1,000 5,736 2,217
Purchases of held-to-maturity securities - (3,694) (1,823)
Investment in non-consolidated affiliate (2,315) - -
Acquisition of property and equipment (28,852) (24,483) (24,774)
Capitalized internal software
development costs (56,775) (46,770) (30,666)
Purchased software (1,192) (711) (418)
Proceeds from disposal of
property and equipment 980 4,555 (580)
Contract acquisition costs - (10,000) -
Business acquisitions (6,178) (28,231) (22,955)
Cash (used) provided by
investing activitie s (91,282) (98,564) 33,938
Financing Activities
Payments on long-term debt (210,265) (20,002) (6,992)
Proceeds from borrowing under
credit facilities 258,862 27,678 -
Issuance of common stock under
stock option plans 6,293 3,079 -
Repurchase of outstanding common stock (73,603) - (91,876)
Cash (used) provided by financing
activities (18,713) 10,755 (98,868)
Effect of exchange rate changes on cash 240 542 (1,367)
Net increase (decrease) in cash and
equivalents (12,973) 17,408 (6,436)
Cash and equivalents at beginning of period 35,094 17,686 24,122
Cash and equivalents at end of period $ 22,121 $ 35,094 $ 17,686
Noncash Activities
Long-term debt arising from and assumed in
connection with business acquisitions $ - $ - $ 2,347
Supplemental Information
Interest paid 3,811 2,323 2,342
Income taxes (received) paid (2,193) 2,793 10,249
<FN>
See accompanying notes.
</TABLE>
<PAGE>26
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 equity method
of accounting is used when the Company does not have effective control and has
a 20% to 50% interest in other companies. Under the equity method, original
investments are recorded at cost and adjusted by the Company's share of
undistributed earnings or losses of these companies. 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.
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalent.
Marketable Securities
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. 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 Stockholders' Equity.
Investment securities with maturities of three months or less at the time of
acquisition are considered cash equivalents.
<PAGE>27
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
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" (FAS 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. FAS 121
also addresses the accounting for long-lived assets that are expected to be
sold or discarded. The Company adopted FAS 121 January 1, 1996. The effect of
adoption was not material to the Company's financial condition or results of
operations.
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 over the estimated useful life,
generally three to five years, 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. 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. Product enhancements are improvements to an existing
product that are intended to extend the life or improve significantly the
marketability of the original product. Costs incurred for product enhancement
are charged to expense as research and development until technological
feasibility of the enhancement has been established. Upon release of the
enhanced product, the unamortized value of the original product is added to
the capitalized cost of the enhancement and amortized using the estimated life
of the enhancement. All costs incurred prior to the establishment of
technological feasibility have been expensed as research and development costs
during the periods in which they were incurred and amounted to $.2 , $.9 and
$2.5 million for the years ended December 31, 1996, 1995 and 1994,
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.
<PAGE>28
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 effect is immaterial.
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
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("FAS 128"), was issued. FAS 128 is designed to improve
the earnings per share information provided in financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements, and increasing the comparability of earnings per share data on
an international basis. FAS 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods, earlier
application is not permitted. The Company will adopt FAS 128 on its effective
date. Proforma earnings per shares of the Company computed using FAS 128 is
not different from earnings per share computed using existing standards and
guidelines.
Other Matters
Certain prior year amounts have been reclassified to conform to current year
presentation.
<PAGE>29
Note 2. Acquisitions
On August 9, 1996, the Company acquired certain assets of Co-Cam Pty Ltd. and
related entities ("Co-Cam") for approximately $6.0 million. Co-Cam,
headquartered in Australia, is principally a software and services provider
for superannuation and pension administration systems. The acquisition has
been recorded using the purchase method of accounting. Accordingly, the
Consolidated Statement of Operations of the Company for the year ended
December 31, 1996, includes the results of operations of Co-Cam from the date
of acquisition.
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 was deferred at the date
of acquisition and was paid during 1996.
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.
The total costs of the acquisitions were determined, and assigned to the net
assets acquired, as follows:
<TABLE>
<CAPTION>
micado Creative
1995 1994
(In Thousands)
<S> <C> <C>
Total consideration paid $30,806 $19,634
Direct costs of acquisition 915 304
Total cost to be assigned to net
assets acquired 31,721 19,938
Add - Liabilities assumed. 12,762 8,789
Less - Cost assigned to tangible and
identifiable intangible assets acquired 25,840 15,560
- Write-off of purchased research
and development 14,500 2,551
Cost assigned to goodwill $ 4,143 $10,616
</TABLE>
Supplemental pro-forma information is not presented since these acquisitions
were not material to the Company's consolidated results of operations in the
year of acquisition.
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>30
Note 3. Marketable 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 years ended December 31, 1996 and
1995. For the year ended December 31, 1994, the Company received $145.9
million in proceeds from sales of available-for-sale securities, and
recognized $1.9 million in gross realized losses, based on the specific
identification method. 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, 1994, the amortized cost of the Company's marketable
securities was $16.3 million, with a market value of $16.7 million.
The following is a summary of available-for-sale and held-to-maturity
securities included in marketable securities as of December 31, 1996:
<TABLE>
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 $ 1,995 $ 1,984 $ - $ (11)
Held-to-Maturity Securities:
Short-Term
Municipal bonds and notes $ 250 $ 250 $ - $ -
Long-Term
Municipal bonds and notes 4,168 4,207 39 -
Total $ 4,418 $ 4,457 $ 39 $ -
</TABLE>
The following is a maturity summary of the available-for-sale and the
held-to-maturity securities included in marketable securities as of
<TABLE>
<CAPTION>
December 31, 1996:
Available-for-Sale Held-to-Maturity
Amortized Amortized
Cost Market Cost Market
(In Thousands)
<S> <C> <C> <C> <C>
Due within 1 year $ - $ - $ 250 $ 250
Due after 1 year through 5 years 1,995 1,984 1,834 1,848
Due after 5 years through 10 years - - 2,334 2,359
Total $1,995 $1,984 $4,418 $4,457
</TABLE>
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 $ -
Long-Term
Municipal bonds and
notes 4,905 4,981 76 -
Total $5,514 $5,592 $78 $ -
</TABLE>
<PAGE>31
Note 4. Property and Equipment
A summary of property and equipment is as follows:
<TABLE>
<CAPTION>
Estimated December 31,
Useful Life 1996 1995
(Years) (In Thousands)
<S> <C> <C> <C>
Cost:
Land - $ 2,729 $ 2,566
Buildings and improvements 10-40 63,670 61,649
Construction in progress - 232 121
Leasehold improvements 1-10 2,799 2,220
Office furniture, fixtures
and equipment 5-15 46,389 40,540
Data processing and
communications equipment
and support software 2-5 115,966 100,742
Other 3-5 6,434 4,913
238,219 212,751
Less: Accumulated depreciation
and amortization (122,462) (103,568)
Property and equipment $115,757 $109,183
</TABLE>
Depreciation and amortization charged to expense was $23.7, $28.1 and $28.7
million for the years ended December 31, 1996, 1995 and 1994, 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. 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,
1996 1995
(In Thousands)
Goodwill $ 65,639 $ 61,341
Customer lists 20,860 20,503
Contract acquisition costs 15,000 15,000
Covenants not to compete 5,136 5,291
Other 6,662 6,189
113,297 108,324
Less: Accumulated amortization (29,934) (19,005)
Goodwill and other intangible assets, net $ 83,363 $ 89,319
Amortization charged to expense was $10.4, $9.3 and $8.7 million for the years
ended December 31, 1996, 1995 and 1994, respectively. 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).
<PAGE>32
Note 6. Capitalized Software Costs
A summary of capitalized software costs is as follows:
December 31,
1996 1995
(In Thousands)
Internally developed software $267,461 $210,686
Purchased software 29,518 26,265
296,979 236,951
Less: Accumulated amortization (119,104) (90,969)
Capitalized software costs, net $177,875 $145,982
Amortization charged to expense was $28.1, $23.2 and $19.8 million for the
years ended December 31, 1996, 1995 and 1994, respectively. 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).
Note 7. Long-Term Debt and Other Borrowings
Long-term debt is as follows:
December 31,
1996 1995
(In Thousands)
Credit facility borrowings (net of unamortized
deferred arrangement costs) $ 62,000 $ 14,746
Notes payable 3,490 1,893
65,490 16,639
Less: Current portion 31,222 1,766
Long-term debt $ 34,268 $ 14,873
On August 9, 1996, the Company renewed 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 .6375% 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 .2%. 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 was 6.16% and 6.34% for the years ended December 31, 1996 and 1995,
respectively.
<PAGE>33
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, 1996, the net unamortized amounts related to this continuing agreement,
included in other intangible assets, were $12.2 million.
During December 1995, as part of the restructuring of its data processing
facilities (see Note 4), the Company entered into two and four 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 $7.7,
$7.1 and $7.4 million for the years ended December 31, 1996, 1995 and 1994,
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.
The Company leased certain data processing and related equipment primarily
under operating leases expiring through 1996. Rent expense under operating
leases for such equipment was $7.5, $4.9 and $5.2 million for the years ended
December 31, 1996, 1995 and 1994, respectively. All minimum lease payments
under operating leases for data processing and related equipment are included
in rent expense.
Future minimum lease obligations under noncancelable operating leases are
stated below and include payments over 18 years aggregating $5.9 million
related to a leasehold planned for future abandonment (see Note 12):
Facilities
Year Ending December 31, (In Thousands)
1997 $ 9,981
1998 6,711
1999 5,484
2000 4,478
2001 4,064
Thereafter 9,846
Total $40,564
<PAGE>34
Contingencies - 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 power to subpoena documents
and to compel testimony in connection with their investigation. The Company is
cooperating with this investigation.
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 trade practices, and fraud. SLD sought direct, indirect, consequential,
and punitive damages in excess of $80 million. In February of 1997 following a
jury trial, the Court and jury entered judgments in favor of the Company
against SLD on the claims of fraud and unfair trade practices. A verdict and
judgment was returned against the Company for breach of contract and damages
of $3.5 million, together with pre-judgment interest. In addition the jury
found that SLD was using the Company's trade secrets without permission.
Pending before the Court are the Company's request for a court order requiring
return of the Company's trade secrets and for SLD to cease further use of the
Company's systems, and the Company's motions for judgment notwithstanding
verdict. Depending on the outcome of the pending matters, the Company may
appeal the judgment to the United States Court of Appeals. As a result of this
judgment, the Company determined it was necessary to increase its estimate of
anticipated liability for the estimated costs associated with these matters,
and at December 31, 1996, provided an additional $6.0 million for the
estimated judgment, interest, and legal expenses arising from this matter.
Changes in the status of this proceeding could result in a change in this
estimate in subsequent periods.
The Company is also presently involved in litigation which commenced in
January 1996 in the Circuit Court in Greenville County, South Carolina with
Liberty Life Insurance Company and certain of its affiliates ("Liberty")
arising out of 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.
Liberty's complaint alleges breach of contract, breach of express and implied
warranties, fraudulent inducement, breach of contract accompanied by a
fraudulent act, and recission. Liberty 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 pursuing
counterclaims against Liberty for breach of contract, recoupment, breach of
good faith and fair dealing, and breach of contract accompanied by a
fraudulent act. The Company is seeking equitable relief, including injunctive
relief, and currently unspecified actual, compensatory and consequential
damages.
Based upon the allegations raised in a prior lawsuit with the California State
Automobile Association ("CSAA") and the SLD lawsuit, the Company's insurer,
St. Paul Mercury Insurance Company ("St. Paul"), commenced in June 1995 a
declaratory judgment action in the United States District Court for the
District of South Carolina 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.
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 resolved the Company's and St. Paul's claims related to
the CSAA matter. The action continues 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.
<PAGE>35
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,
1996 1995 1994
Provision for taxes at the
statutory rate 35.0% 35.0% (35.0)%
Increase (decrease) in provision from:
Goodwill (3.4) (31.4) 25.1
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)
State and local income taxes,
net of federal tax effect 1.8 3.0 (0.2)
Differences in foreign and US tax rate - (23.2) 0.3
Deferred tax asset valuation allowance - 14.8 -
Other 2.8 6.0 1.8
1.2% 26.1% (12.8)%
Effective income tax
provision (benefit) rate 36.2% 61.1% (47.8)%
An analysis of the income tax provision (benefit) is as follows:
Year ended December 31,
1996 1995 1994
(In Thousands)
Current domestic taxes $ 2,494 $ (1,858) $(6,558)
Current foreign taxes 4,835 3,309 951
Total current taxes 7,329 1,451 (5,607)
Deferred income taxes relating to
temporary differences:
Depreciation and amortization
of property, equipment and
intangibles 664 (1,748) (7,808)
Capitalized software
development costs 10,511 8,876 6,555
Impairment and restructuring of
operations 3,120 1,312 2,145
Internal Revenue Service
settlement - - (6,000)
Revaluation of deferred state
income tax liability - (497) (999)
Litigation settlement
and expenses, net 4,184 (3,445) (1,489)
Other 243 (1,007) 4,372
18,722 3,491 (3,224)
Total income tax
provision (benefit) $ 26,051 $ 4,942 $(8,831)
<PAGE>36
An analysis of the net deferred income tax liability is as follows:
December 31,
1996 1995
(In Thousands)
Current deferred assets:
Net operating loss carryforward $ 8,743 $ 745
Litigation settlements 2,847 4,915
Restructuring loss from foreign operations 790 849
Accrued bonuses and commissions 606 1,197
Other 2,357 2,555
Current deferred assets 15,343 10,261
Long-term deferred assets:
State tax credits 907 2,307
Depreciation from foreign operations 436 -
Other 217 29
Long term deferred assets 1,560 2,336
Total deferred assets $16,903 $12,597
Current deferred liabilities:
Other $ 39 $ 61
Current deferred liabilities 39 61
Long-term deferred liabilities:
Depreciation and amortization of property,
equipment and intangibles 16,335 16,378
Capitalized software development costs 53,844 43,959
Net operating loss carryforward (9,095) (19,049)
Foreign tax credit carryforward (3,846) (3,771)
Impairment and restructuring of operations (789) (4,202)
Other 1,921 337
Long-term deferred liabilities 58,370 33,652
Total deferred liabilities $58,409 $33,713
The Company generated a $23.9 million net operating loss for the year ended
December 31, 1995 for tax purposes. Certain foreign subsidiaries of the
Company have net operating loss carryforwards at December 31, 1996 totaling
approximately $3.7 million, which may be used to offset future taxable income.
The carryforwards have no expiration period.
During 1994 the Company reached a final settlement with the Internal Revenue
Service resulting in a $3.9 million payment and a $6.0 million reduction in
the Company's provision for income taxes for the year ended December 31, 1994.
No provision has been made for federal income taxes on unremitted earnings of
certain of the Company's foreign subsidiaries (approximately $24 million at
December 31, 1996) since the Company plans to permanently reinvest all such
earnings. However, if such earnings were remitted, there would be additional
federal income tax expense of $3.1 million.
The Company has foreign tax credit carryforwards at December 31,1996 of $3.8
million which will expire on December 31, 2001. 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>37
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 and 1994 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, $3.5 and $2.2 million for the years ended
December 31, 1996, 1995 and 1994, 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 and its subsidiaries.
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, the 1993 Long-Term Incentive Plan for Executives was 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.
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,
1996, 1995 and 1994, were $15.13 to $49.63. The exercise prices of shares
under option at December 31, 1996, 1995 and 1994, other than under the 1993
Long-Term Incentive Plan for Executives, were $15.13 to $69.38.
<PAGE>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 after May, July and November
1995 are exercisable at the rate of 20% per year (cumulative), beginning one
year from date of grant, except for 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.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). 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 has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25)and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions
for 1996 and 1995, respectively: risk-free interest rates of 6.4% and 6.5%;
volatility factors of the expected market price of the Company's common stock
of 42.7% and 43.8%; and weighted-average expected life of the options of 5.0
and 5.0 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
Year Ended December 31,
Net Income 1996 1995
(In Thousands)
As reported $45,997 $ 3,139
Pro forma 41,564 2,035
Primary earnings per share
As reported $ 2.47 $ .16
Pro forma 2.23 .06
<PAGE>39
Option activity under all of the stock option plans is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding
at beginning
of year 3,106,164 $49.78 2,804,328 $50.56 1,725,119 $61.88
Granted 776,968 42.14 674,359 47.99 1,361,143 39.15
Exercised (148,084) 36.34 ( 73,130) 37.48 - -
Forfeited ( 86,666) 58.40 (299,393) 56.04 (281,934) 64.73
Outstanding at
end of year 3,648,382 $48.49 3,106,164 $49.78 2,804,328 $50.56
Options
exercisable
at year end 1,218,203 1,119,562 878,165
Weighted-
average fair
value of options
granted during
the year $19.65 $22.81 $20.38
</TABLE>
[FN]
The following table summarizes information about fixed options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life Price Shares Price
<S> <C> <C> <C> <C> <C>
$24 to 30 280,236 7.2 years $29.55 179,844 $29.17
31 to 36 536,114 6.0 years 34.35 136,328 33.28
43 to 49 1,279,402 7.6 years 43.57 344,250 45.09
50 to 60 932,530 5.2 years 50.12 218,931 49.63
65 to 80 620,100 5.9 years 76.95 338,850 72.84
3,648,382 1,218,203
</TABLE>
Note 11. Certain Transactions
On April 8, 1996 the Company repurchased 759,512 of the 1,519,024 shares of
the Company's common stock held by GAP Coinvestment Partners and General
Atlantic Partner 14 L.P. (collectively "General Atlantic Investors") and the
remainder of the Company's shares owned by General Atlantic Investors were
purchased by Continental Casualty Company, a licensee of the Company's Series
III Solutions. The repurchase by the Company, at a price of $50.00 per share,
resulted in an aggregate cash expenditure (after related costs) of
approximately $38.7 million.
During 1996, the Company repurchased 759,512 shares of its commons stock from
General Atlantic Investors and 645,500 shares of its common stock on the open
market. There were no shares repurchased during the twelve months ended
December 31, 1995. 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.
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, 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 General Atlantic Investors. 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 represented 10% of its total shares outstanding
prior to the repurchase.
<PAGE>40
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 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 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
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 were not fully
recoverable. Therefore 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 1995, the Company continued to examine its options to improve the
overall performance of the risk information services business. 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. As a result of its continued
detailed business assessment, the Company 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 sold the
pre-employment business and completely ceased and abandoned 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.
In 1995, the Company performed a detailed assessment of the on-site medical
correspondence information services business and 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).
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 cash flows for
this business for the period until the Series III migration was completed did
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. A cash flow valuation performed by the Company
under the above assumptions indicated that the expected discounted future cash
flows of this business did 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 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 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 Auen-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.
<PAGE>41
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.
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.
During 1994, the Company changed its estimates and reduced its restructuring
reserves (established in June 1993) associated with its health insurance
systems business by $4.4 million. Of this reduction, $2.6 million 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 while $1.8 million of the reduction resulted from a lease termination at
amounts less than those established for the planned future abandonment of
certain leased office facilities.
<PAGE>42
Note 13. Segment Information
The Company's operations are classified into five operating units. Operating
business units are revenue producing components of the Company about which
separate financial information is produced internally and operating decisions
are made. The units are as follows:
1. Property and casualty enterprise software and services (generally referred
to as the "domestic property and casualty business"). This unit provides
software products, product support, professional services and outsourcing to
the US property and casualty insurance market.
2. Life enterprise software and services (generally referred to as the
"domestic life business"). This unit provides software products, product
support, professional services and outsourcing to the US life insurance and
financial services markets. Additionally, in 1995 and 1994 this unit included
the Company's Health division which was sold in June 1995.
3. International. This unit provides software products, product support,
professional services, outsourcing and information services to the property
and casualty and life insurance markets primarily in Canada, Europe and
Asia/Pacific.
4. Property and casualty information services. This unit provides information
services, principally motor vehicle records and claims histories, to US
property and casualty insurers.
5. Life information services. This unit provides information services,
principally physician reports and medical histories to US life insurers.
Information about the Company's operations for the past three years is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
Revenues (In Thousands)
<S> <C> <C> <C>
Enterprise Software and Services
Property and Casualty $216,093 $193,470 $168,060
Life 78,670 61,405 65,182
Information Services
Property and Casualty 90,442 107,902 133,209
Life 53,526 52,819 57,201
Total U.S. net revenues $438,731 $415,596 $423,652
International 143,178 121,706 69,054
Total net revenues $581,909 $537,302 $492,706
Operating Income
Enterprise Software and Services
Property and Casualty $ 65,040 $ 55,227 $ 33,671
Life 15,315 18,071* 19,980*
Information Services
Property and Casualty 1,442 (11,376) (21,835)
Life 2,271 2,659 3,235
Corporate (19,020)** (80,508)**(62,040)**
Total U.S. operating income 65,048 (15,927) (26,989)
International 9,677 24,551 7,244
Total income (loss) before
income taxes (benefit) $ 74,725 $ 8,624 $(19,745)
Identifiable Assets
Enterprise Software and Services
Property and Casualty $326,541 $410,896 $385,974
Life 91,776 97,309 81,013
Information Services
Property and Casualty 19,806 19,149 21,276
Life 24,669 22,423 21,516
Corporate 14,906 26,746 19,954
Total US identifiable assets 477,698 576,523 529,733
International 120,684 135,695 96,986
Eliminations (26,164) (179,482) (102,688)
Total identifiable assets $572,218 $532,736 $524,031
<FN>
**Includes operating income from the Health Division (divested June 30, 1995)
of $1.0 million and $8.3 million in 1995 and 1994, respectively. Also 1995
includes a pre-tax gain of $8.1 million on the sale of the Health business
related assets.
**Corporate operating income includes special charges and writeoffs.
</TABLE>
<PAGE>43
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 accrued 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 conditions,
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
On February 7, 1997, the federal court entered a judgment for damages of $3.5
million against the Company for breach of contract in its lawsuit with
Security Life of Denver following a jury trial. As a result, the Company has
recorded a provision of $6.0 million in 1996 to cover the damages, prejudgment
interest and anticipated legal fees and expenses arising from these matters.
The company is still evaluating its post-trial options and has made a number
of post-trial motions. Additionally the Company is pursuing claims against
its insurance carrier for legal fees and expenses in this case (See also Note
8 Contingencies - Legal Proceedings).
<PAGE>44
<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)
1996
<S> <C> <C> <C> <C>
Revenues $133,183 $137,332 $146,998 $164,396
Operating income 18,086 25,065 15,296 16,278
Other income and
expenses, net (115) (432) (1,099) (1,031)
Income before income
taxes 17,971 24,633 14,197 15,247
Net income $ 11,628 $ 15,803 $ 9,007 $ 9,559
Net income per share $ .60 $ .85 $ .50 $ .53
1995
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
incometaxes (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)
<FN>
The results of operations in 1996 reflect a litigation related pre-tax charge
recorded in the fourth quarter of $6.0 million. Additionally, the Company
recorded a litigation related pre-tax gain of $9.4 million for the three
months ended June 30, 1996.
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).
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>45
SCHEDULE II
<TABLE>
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, 1996 $ 2,042 687 - (1,846)(2) $ 883
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
Accrued restructuring
and lease termination
costs Year ended
December 31, 1996 $13,895 434(3) - (10,510)(4) $ 3,819
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
Allowance for deferred
tax assets Year ended
December 31, 1996 $ 3,090 - (286) - $ 2,804
Allowance for deferred
tax assets Year ended
December 31, 1995 $ - - 3,090 - $ 3,090
<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>46
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, is included on page 21 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 20 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.
Atlanta, Georgia
February 7, 1997
<PAGE>47
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 1997 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 1997 Proxy Statement titled "Principal
Stockholders" and "Stock Ownership of Directors, Directors Nominees and
Executive Officers" are incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The section of the Company's 1997 Proxy Statement titled "Certain
Transactions" and Compensation Committee Interlocks and Insider Participation"
are incorporated herein by reference.
<PAGE>48
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
20.
Exhibits Filed
Exhibits required to be filed with this Annual Report on Form 10-K are listed
in the following Exhibit Index.
Pursuant to Rule 15d-21 promulgated under the Securities Exchange Act of 1934,
the following annual report for the Company's employee stock purchase plan
will be furnished to the Commission when the information becomes available:
Form 11-K for the Company's 401(k) Retirement Savings Plan for the year ended
December 31, 1996 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, 1996.
<PAGE>49
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 24, 1997 Timothy V. Williams, Executive Vice
President and Chief Financial Officer
BY (SIGNATURE) /s/ Stan F. Stoudenmire
DATE March 24, 1997 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 24, 1997 Directors, President and Chief Executive
Officer
BY (SIGNATURE) /s/ Roy L. Faulks
(NAME AND TITLE) Roy L. Faulks, Vice Chairman of the
DATE March 24, 1997 Board of Directors
BY (SIGNATURE) /s/ John P. Seibels
(NAME AND TITLE) John P. Seibels, Director
DATE March 24, 1997
BY (SIGNATURE) /s/ Frederick B. Karl
(NAME AND TITLE) Frederick B. Karl, Director
DATE March 24, 1997
BY (SIGNATURE) /s/ Richard G. Trub
(NAME AND TITLE) Richard G. Trub, Director
DATE March 24, 1997
BY (SIGNATURE) /s/ Joseph D. Sargent
(NAME AND TITLE) Joseph D. Sargent, Director
DATE March 24, 1997
BY (SIGNATURE) /s/ Dr. John M. Palms
(NAME AND TITLE) Dr. John M. Palms, Director
DATE March 24, 1997
<PAGE>50
POLICY MANAGEMENT SYSTEMS CORPORATION
EXHIBIT INDEX
Exhibit
Number
3. ARTICLES OF INCORPORATION AND BY-LAWS
A. Bylaws of the Company, as amended through July 19, 1994 incorporating
all amendments thereto subsequent to December 31, 1993 (filed as an
Exhibit to Form 10-K for the year ended December 31, 1994, and is
incorporated herein by reference)
B. Articles of Incorporation of the Company, as amended through October 13,
1994, incorporating all amendments thereto subsequent to December 31,
1993 (filed as an Exhibit to Form 10-K for the year ended December 31,
1994, and is incorporated herein by reference)
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES
A. Specimen forms of certificates for Common Stock of the Company (filed
as an Exhibit to Registration Statement No. 2-74821, dated December 16,
1981, and is incorporated herein by reference)
B. Articles of Incorporation of the Company, as amended through October 13,
1994, incorporating all amendments thereto subsequent to December 31,
1993 (filed as an Exhibit to Form 10-K for the year ended December 31,
1994, and is incorporated herein by reference)
10. MATERIAL CONTRACTS
A. Policy Management Systems Corporation 1986 Stock Option Plan (filed as
an Exhibit to Form 10-K for the year ended December 31, 1986, and is
incorporated herein by reference)
B. Conformed copy of Development and Marketing Agreement between
International Business Machines Corporation and Policy Management
Systems Corporation, dated July 26, 1989 (File No. 0-10175 - filed under
cover of Form SE filed on September 29, 1989, and is incorporated herein
by reference)
C. Policy Management Systems Corporation 1989 Stock Option Plan (File No.
0-10175 - filed under cover of Form SE on March 22, 1991, and is
incorporated herein by reference)
<PAGE>51
<PAGE>
D. Deferred Compensation Agreement with G. Larry Wilson (filed as an
Exhibit to Form 10-K for the year ended December 31, 1993, and is
incorporated herein by reference)
E. Executive Compensation Agreement with G. Larry Wilson (filed as
an Exhibit to Form 10-K for the year ended December 31, 1993, and
is incorporated herein by reference)
F. Employment Agreement with Stephen G. Morrison (filed as an Exhibit
to Form 10-Q for the quarter ended March 31, 1994, and is
incorporated herein by reference)
G. Stock Option/Non-Compete Agreement with Stephen G. Morrison (filed
as an Exhibit to Form 10-Q for the quarter ended March 31, 1994,
and is incorporated herein by reference)
H. Shareholders' Agreement, dated April 26, 1994, among Policy
Management Systems Corporation, General Atlantic Partners 14, L.P.
and GAP Coinvestment Partners (filed as an Exhibit to Form 10-Q
for the quarter ended September 30, 1994, and is incorporated
herein by reference)
I. Registration Rights Agreement, dated April 26, 1994 among Policy
Management Systems Corporation, General Atlantic Partners 14, L.P.
and GAP Coinvestment Partners (filed as an Exhibit to Form 10-Q
for the quarter ended September 30, 1994, and is incorporated
herein by reference)
J. Employment Agreement with Timothy V. Williams (filed as an Exhibit
to Form 10-K for the year ended December 31, 1994, and is
incorporated herein by reference)
K. Stock Option/Non-Compete Form Agreement for named executive
officers together with schedule identifying particulars for each
named executive officer (filed as an Exhibit to Form 10-Q for the
quarter ended September 30, 1992, and is incorporated herein by
reference)
L. Stock Option/Non-Compete Form Agreement for named executive
officers together with schedule identifying particulars for each
named executive officer (filed as an Exhibit to Form 10-Q for the
quarter ended September 30, 1994, and is incorporated herein by
reference)
M. Stock Option (Non-Compete Form Agreement for named executive
officers together with schedule identifying particulars for each
named executive officer (filed as an Exhibit to Form 10-K for the
year ended December 31, 1994, and is incorporated herein by
reference)
N. Policy Management Systems Corporation 1993 Long-Term Incentive
Plan for Executives (filed as an Exhibit to Form 10-K for the year
ended December 31, 1994, and is incorporated herein by reference)
O. First Amendment to the Policy Management Systems Corporation 1989
Stock Option Plan (filed as an Exhibit to Form 10-K for the year
ended December 31, 1994, and is incorporated herein by reference)
<PAGE>52
P. Fourth Amendment to the Policy Management Systems Corporation 1989
Stock Option Plan (filed as an Exhibit to Form 10-Q for the
quarter ending March 31, 1995, and is incorporated herein by
reference)
Q. Second and Third Amendments to the Policy Management Systems
Corporation 1989 Stock Option Plan (filed as an Exhibits and to
Form 10-Q for the quarter ended June 30, 1995, and is incorporated
herein by reference)
R. Stock Option/Non-Compete Form Agreement for named executive
officers together with schedule identifying particulars for each
named executive officer (filed as an Exhibit to Form 10-Q for the
quarter ended June 30, 1995, and is incorporated herein by
reference)
S. Stock Option/Non-Compete Form Agreement for named executive
officers together with schedule identifying particulars for each
named executive officer (filed as an Exhibit to Form 10-K for year
ended December 31, 1995, and is incorporated herein by reference)
T. Stock Option/Non-Compete Form Agreement for named executive
officers together with schedule identifying particulars for each
named executive officer (filed as an Exhibit to Form 10-K for year
ended December 31, 1995, and is incorporated herein by reference)
U. 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 as an Exhibit to Form 10-K for year
ended December 31, 1995, and is incorporated herein by reference)
V. Stock Option/Non-Compete Agreement with Timothy V. Williams dated
February 1, 1994 (filed as an Exhibit to Form 10-K for year ended
December 31, 1995, and is incorporated herein by reference)
W. Stock Option/Non-Compete Agreement with Timothy V. Williams dated
May 10, 1995 (filed as an Exhibit to Form 10-K for year ended
December 31, 1995, and is incorporated herein by reference)
X. Registration Rights Agreement, dated March 8, 1996, between Policy
Management Systems Corporation and Continental Casualty Company
(filed as an Exhibit to Form 10-Q for the quarter ended March 31,
1996, and is incorporated herein by reference)
Y. Shareholders Agreement dated March 8, 1996 between Policy
Management Systems Corporation and Continental Casualty Company
(filed as an Exhibit to Form 10-Q for the quarter ended March 31,
1996, and is incorporated herein by reference)
Z. Stock Option/Non-Compete Form Agreement for named executive
officers together with schedule identifying particulars for each
named executive officer (filed as an Exhibit to Form 10-Q for the
quarter ended June 30, 1996, and is incorporated herein by
reference)
<PAGE>53
AA. 364-Day Credit Agreement dated as of August 11, 1995 among
Policy Management Systems Corporation, the Guarantors Party
thereto, the Banks Listed therein and Morgan Guaranty Trust
Company of New York as Agent (filed as an Exhibit to Form for
the quarter ended June 30, 1996, and is incorporated herein by
reference)
BB. Three-Year Credit Agreement dated as of August 11, 1995 among
Policy Management Systems Corporation, the Guarantors Party
thereto, the Banks Listed therein and Morgan Guaranty Trust
Company of New York as Agent (filed as an Exhibit to Form 10-Q
for the quarter ended June 30, 1996, and is incorporated herein
by reference)
CC. Amendment No. 1 to 364-Day Credit Agreement dated September 29,
1995 among Policy Management Systems Corporation and Morgan
Guaranty Trust Company of New York (filed as an Exhibit to Form
10-Q for the quarter ended June 30, 1996, and is incorporated
herein by reference)
DD. Amendment No. 1 to Three-Year Credit Agreement dated September
29, 1995 among Policy Management Systems Corporation and Morgan
Guaranty Trust Company of New York (filed as an Exhibit to Form
10-Q for the quarter ended June 30, 1996, and is incorporated
herein by reference)
EE. Amendment No. 2 to 364-Day Credit Agreement dated March 29, 1996
among Policy Management Systems Corporation and Morgan Guaranty
Trust Company of New York (filed as an Exhibit to Form 10-Q for
the quarter ended June 30, 1996, and is incorporated herein by
reference)
FF. Amendment No. 2 to Three-Year Credit Agreement dated March 29,
1996 among Policy Management Systems Corporation and Morgan
Guaranty Trust Company of New York (filed as an Exhibit to Form
10-Q for the quarter ended June 30, 1996, and is incorporated
herein by reference)
GG. 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 (filed as an Exhibit to Form 10-Q for
the quarter ended September 30, 1996, and is incorporated herein
by reference)
HH. Amendment No. 3 to Three-Year Credit Agreement dated August 9,
1996 among Policy Management Systems Corporation and Morgan
Guaranty Trust Company of New York (filed herewith)
II. Employment Agreement Form dated November 7, 1996 for Messrs.
Butare, Morrison and Williams together with a schedule
identifying particulars for each executive officer (filed
herewith)
JJ. Stock Option/Non-Compete Agreement with Stephen G. Morrison
dated October 22, 1996 (filed herewith)
<PAGE>54
11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
A. Filed herewith
21. SUBSIDIARIES OF THE REGISTRANT
A. Filed herewith
23. CONSENTS OF EXPERTS AND COUNSEL
A. Consent of Coopers & Lybrand (filed herewith)
27. FINANCIAL DATA SCHEDULE
A. Filed herewith
<PAGE>1
[CONFORMED COPY]
AMENDMENT NO. 3 TO 3-YEAR CREDIT 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
3-Year 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. 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
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
<PAGE>3
(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 4. 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 5. 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 6. 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 7. 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 8. 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 9. 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 10. 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 11. 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
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 /s/ Stephen G. Morrison
Title: Executive Vice President &
General Counsel
POLICY MANAGEMENT SYSTEMS
INVESTMENTS, INC.
By /s/ Gordon W. Stewart
Title: Secretary
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
<PAGE>6
By /s/ Eugenia Wilds
Title: Vice President
FIRST UNION NATIONAL
BANK OF SOUTH CAROLINA
By /s/ Gregory G. Burke
Title: Vice President
WACHOVIA BANK OF SOUTH
CAROLINA, N.A.
By /s/ Gina W.Lesslie
Title: Vice President
BANK OF AMERICA ILLINOIS
By /s/ Michael J. McKenney
Title: Vice President
COMMERZBANK
AKTIENGESELLSCHAFT,
ATLANTA AGENCY
By /s/ A. Bremer
Title: Senior Vice President
<PAGE>7
By /s/ H. Yergey
Title: Vice President
THE DAI-ICHI KANGYO BANK
LTD., ATLANTA AGENCY
By /s/ Toshiaki Kurihara
Title: Joint General Manager
NBD BANK
By /s/ Larry Schuster
Title: Authorized Agent
DEUTSCHE BANK AG NEW YORK
AND/OR CAYMAN ISLANDS
BRANCHES
By /s/ Ralf Hoffmann
Title: Vice President
By /s/ Jean W. Hannigan
Title: Vice President
THE FUJI BANK, LIMITED,
ATLANTA AGENCY
<PAGE>8
By /s/ Toshihiro Mitsui
Title: Vice President & Manager
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 > _
0.525%
0.625%
Euro-Dollar
Margin
Usage
< _
Usage > _
0.4%
0.5%
Facility Fee
Rate
0.2%
<PAGE>9
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>1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of November 7, 1996, by
and between Policy Management Systems Corporation, a South Carolina corporation
("Employer"), and ______________ ("Employee").
WHEREAS, Employer currently employs Employee as its ___________________________
and
WHEREAS, Employer and Employee are desirous of continuing Employees' employment
with Employer for the period, and on the terms and conditions, set forth herein.
NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants
and obligations herein contained, the parties hereby agree as follows:
1. Employment. Employer hereby employs Employee, and Employee accepts such
employment, according to the terms and conditions set forth in this
Agreement.
2. Term.
(i) The term of Employee's employment hereunder shall be for a period
commencing on November 7, 1996 and continuing through December 31,
2001 (the "Normal Term"); provided, however, that effective as of
December 31, 1997, and as of each December 31 thereafter, the
Normal Term shall be extended for an additional 12-month period
unless, not later than six (6) months prior to such December 31,
either party hereto shall have given notice to the other that the
Normal Term shall not be so extended. Notwithstanding the
foregoing, Employee's employment by Employer hereunder may be
earlier terminated, subject to Section 8 hereof. The period of time
between the commencement and termination of Employee's employment
hereunder shall be referred to herein as the "Employment Period."
(i) In the event of a "Change in Control" as defined in Section 8 of
this Agreement, the Normal Term shall be extended for an additional
12-month period.
3. Position and Services.
(i) Employee shall hold the position of ______________________ of
Employer, or such other position as may be determined by the
Employer's Board of Directors (the "Board"). Employee shall have
such duties, responsibilities, and authority with respect to such
position as are consistent with the duties, responsibilities, and
authority he has as of the date of the execution of this Agreement
or such other responsibilities, duties, and authority as from time
to time may be assigned to
<PAGE>2
Employee by the Board, including (but not limited to) serving on the Board, if
elected.
(ii) Employee will be expected to be in the full-time employment of
Employer, and to devote all of his business time, attention, and
efforts to the performance of his duties hereunder. Notwithstanding
the foregoing, Employee may make and manage passive personal
business investments of his choice and serve in any capacity with
any civic, educational, or charitable organization, or any trade
association, without seeking or obtaining approval by the Board,
provided such activities and service do not interfere or conflict
with the performance of his duties hereunder or violate the
provisions hereof.
4. Base Salary.
(i) Employer shall pay to Employee an initial base salary at an annual
rate of $_______, subject to applicable income and employment tax
withholdings and all other required and authorized payroll
deductions and withholdings. Employee's salary shall be payable in
accordance with Employer's payroll practices. Employee's annual
base salary may be adjusted during the Employment Period in
accordance with Employer's then-current compensation practices.
During the Employment period, Employee's base salary rate shall not
be reduced below the inital base salary rate provided hereunder, nor
below any increased base salary rate that may be effected as
provided hereunder.
(ii) In the event of a "Change in Control" as defined in Section 8 of
this Agreement, Employee's base salary, as in effect immediately
prior to such Change in Control, shall be increased to 150% of such
base salary.
5. Incentive Pay. In addition to Employee's base salary as provided above,
Employee shall be eligible for an annual cash incentive bonus for each
calendar year during the Employment Period. Such bonus shall provide an
opportunity for Employee to earn additional annual compensation equal to
not less than forty percent (40%) of his base salary under a program of
defined goals, including personal and/or unit and/or group and/or
corporate goals. Employee also shall be entitled to be elected to
Employer's Executive Council by the Board and to participate in Employer's
Long-Term Incentive Pay Plan of Executives in accordance with the terms of
such Plan in effect from time to time during his employment.
6. Employee Benefits and Perquisites. Employee shall be entitled to receive
the same standard employment benefits as similarly situated executive
employees of Employer receive from time to time. Employee shall be
entitled to fully participate in all of Employer's future employee benefit
programs for executive employees generally, in accordance with their then-
<PAGE>4
existing terms. Nothing herein shall be interpreted as limiting Employer's
right to amend or terminate any employee benefit plan or program at any time
in any manner as applied to similarly situated executive employees of Employer
generally. Employee shall also be entitled to receive the same standard
perquisites as similarly situated executive employees of Employer receive from
time to time, including, without limitation, the use of an automobile selected
by Employer.
7. Working Facilities. Employee shall be furnished an office, personal
secretary, and other facilities and services suitable to his position and
adequate for the performance of his duties, which shall be substantially
similar to those available from time to time to similarly situated
executive employees of Employer.
8. Termination. This Agreement does not grant Employee any right or
entitlement to be retained by Employer, and shall not affect or prejudice
Employer's right to discharge Employee in accordance herewith. Employer
may terminate Employee's employment hereunder immediately for any reason.
In the event of termination of Employee's employment under the
circumstances described below in this Section 8, Employee shall be
entitled to the severance pay specified herein.
(a) Termination By Employer For Cause. In the event of termination of
Employee's employment hereunder by Employer "For Cause," Employee
shall not be entitled to any severance pay, except as otherwise
provided in any applicable benefits plans of Employer that cover
Employee.
A termination of Employee's employment hereunder by Employer shall
be deemed to have occurred "For Cause" if, within a reasonable
period after such termination, a good faith finding shall be made by
a majority of the Board that such termination occurred as a result
of any of the following: (A) any act committed by Employee which
shall represent a breach in any material respect of any of the terms
of this Agreement and which breach is not cured within thirty (30)
days of receipt by Employee of written notice from Employer of such
breach; (B) improper conduct, consisting of any willful act or
omission with the intent of obtaining, to the material detriment of
Employer, any benefit to which Employee would not otherwise be
entitled; (C) improper conduct consisting of sexual harassment or
act of moral turpitude; (D) gross negligence, consisting of wanton
and reckless acts or omissions in the performance of Employee's
duties to the material detriment of Employer; (E) bad faith in the
performance of Employee's duties, consisting of willful acts or
omissions, to the material detriment of Employer, including
excessive unexcused absence from work; (F) use of illegal drugs or
unauthorized use of alcohol in the workplace or being under the
influence of illegal drugs or alcohol while at work; or (G) any
conviction of, or plea of nolo contendere to, a crime (other than a
traffic violation) that constitutes a felony under the laws of the
United States or any political subdivision thereof. Employer shall
provide written notice to Employee, within a
<PAGE>4
reasonable time period, that the Board is convening for purposes of determining
whether Employee's termination of employment was For Cause and Employee (or his
representative) shall have the right to appear before the Board in connection
with such determination.
(b) Termination By Employer Other Than For Cause. In the event of
termination of Employee's employment hereunder by Employer prior to
the end of the Normal Term other than "For Cause" as described
above, Employee shall be entitled to severance payments in the form
of continuation of Employee's base salary, as in effect immediately
prior to such termination, for the remainder of the Normal Term.
For the remainder of the Normal Term Employee shall also receive an
annual payment equal to:
(i) the highest annual bonus paid to Employee with respect to his
performance during the two calendar years preceding his
termination of employment, if such termination is before a
Change in Control; or
(ii) 150% of the highest annual bonus paid to Employee with respect
to his performance during the two calendar years preceding his
termination of employment, if such termination is after a
Change in Control.
Such payment shall be made in equal monthly installments commencing
the first day of the first month following such termination.
(c) Termination By Employee For Good Reason Before Or After A Change In
Control. In the event of termination of Employee's employment
hereunder by Employee prior to the end of the Normal Term "For Good
Reason," Employee shall be entitled to severance payments in the
form of continuation of Employee's base salary, as in effect
immediately prior to such termination, for the remainder of the
Normal Term. For the remainder of the Normal Term Employee shall
also receive an annual payment equal to:
(i) the highest annual bonus paid to Employee with respect to his
performance during the two calendar years preceding his
termination of employment, if such termination is before a
Change in Control; or
(ii) 150% of the highest annual bonus paid to Employee with respect
to his performance during the two calendar years preceding his
termination of employment, if such termination is after a
Change in Control.
Such payment shall be made in equal monthly installments commencing
the first day of the first month following such termination.
<PAGE>5
The employment of Employee hereunder shall be deemed to have been
terminated "For Good Reason" upon termination of employment by Employee
following a "constructive termination event," subject to the provisions of
this subsection (c).
For purposes hereof, the following shall constitute constructive
termination events if such events occur prior to a "Change in
Control" (as hereinafter defined): (1) any removal of Employee
from the position of _________________; (2) any substantive
reduction of Employee's duties, responsibilities, or authority; and
(3) a material breach by Employer of any of its obligations to
provide Employee with the compensation and benefits provided in
Sections 4 through 7 hereof.
For purposes hereof, the following shall constitute constructive
termination events if such events occur upon or after a Change in
Control: (1) any reduction of Employee's salary; (2) failure to pay
an annual bonus to Employee for each calendar year that ends after
a Change in Control in an amount representing a percentage of
Employee's salary at least as great as the average of the respective
percentages of Employee's salary represented by Employee's bonuses
for the three most recent calendar years before a Change in Control
(with any of such calendar years during which no bonus was paid to
be counted as 0% years); (3) a material reduction from pre-Change in
Control levels in Employee's employee benefits and perquisites
(other than bonus plans which are covered above), unless Employer
provides a substitute benefit that is at least as favorable on an
after-tax basis; (4) a material reduction in Employee's title,
position, reporting relationship, responsibilities, or authority;
and (5) a relocation of Employee's office by more than thirty-five
(35) miles that increases Employee's travel distance from home.
An event described above as a constructive termination event shall
be treated as a constructive termination event hereunder following
the expiration of thirty (30) days from the date Employee has
notified Employer of the occurrence of such event and his intention
to treat such event as a constructive termination event and
terminate his employment on the basis thereof, provided that
Employer has not cured the constructive termination event before the
expiration of such thirty (30) day period. Any notice given by
Employee under this paragraph shall be effective only if given to
Employer in writing within forty-five (45) days after the event in
question.
A "Change in Control" shall be deemed to have taken place upon the
occurrence of one of the following events:
(1) any "person" (as such term is defined in Section 3 (a) (9) of
the Exchange Act and as used in Sections 13 (d) (3) and 14 (d)
(2) of the Exchange Act) is or becomes a "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 33 1/3
% or more of the combined voting power of the Company's then
outstanding
<PAGE>6
securities eligible to vote for the election of the Board (the "Company Voting
Securities"); provided, however, that the event described in this paragraph
shall not be deemed to be a Change in Control by virtue of any of the following
situations: (i) an acquisition by the Company or any of its subsidiaries; (ii)
an acquisition by any employee benefit plan or employee stock plan sponsored or
maintained by the Company or any of its subsidiaries or any trustee or fiduciary
with respect to such plan; or (iii) an acquisition by any underwriter
temporarily holding Company Voting Securities pursuant to an offering of such
securities;
(2) individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at
least a majority thereof; provided, however, that any person
becoming a director subsequent to the date hereof, whose
election, or nomination for election, by the Company's
shareholders was approved by a vote of at least two-thirds of
the directors comprising the Incumbent Board who are then on
the Board (either by a specific vote or by approval of the
proxy statement of the Company in which such person is named
as a nominee for director, without objection to such
nomination) shall be, for purposes of this paragraph (2),
considered as though such person were a member of the
Incumbent Board, but excluding for this purpose any individual
elected or nominated as a director of the Company as a result
of any actual or threatened solicitation of proxies or
consents by or on behalf of any person other than the Board;
(3) the consummation of a merger, consolidation, share exchange or
similar form of corporate reorganization of the Company or any
of its subsidiaries that requires the approval of the
Company's shareholders, whether for such transaction or the
issuance of securities in connection with the transaction or
otherwise (a "Business Combination"), unless (i) immediately
following such Business Combination: (A) more than 50% of the
total voting power of the corporation resulting from such
Business Combination (the "Surviving Corporation") or, if
applicable, the ultimate parent corporation which directly or
indirectly has beneficial ownership of 100% of the voting
securities eligible to elect directors of the Surviving
Corporation (the "Parent Corporation"), is represented by
Company Voting Securities that were outstanding immediately
prior to the Business Combination (or, if applicable, shares
into which such Company Voting Securities were converted
pursuant to such Business Combination), and such voting power
among the holders thereof is in substantially the same
proportion as the voting power of such Company Voting
Securities among the holders thereof immediately prior to the
Business Combination, (B) no person (other than any employee
benefit plan or employee stock plan sponsored or maintained by
the Surviving Corporation or Parent Corporation or any trustee
or fiduciary with respect to
<PAGE>7
any such plan) is or becomes the beneficial owner, directly or indirectly, of 33
1/3% or more of the total voting power of the outstanding voting securities
eligible to elect directors of the Parent Corporation (or, if there is no Parent
Corporation, the Surviving Corporation), and (C) at least a majority of the
members of the board of directors of the Parent Corporation (or, if there is no
Parent Corporation, the Surviving Corporation), following the Business
Combination, were members of the Incumbent Board at the time of the Board's
approval of the execution of the initial agreement providing for such Business
Combination or (ii) the Business Combination is effected by means of the
acquisition of Company Voting Securities from the Company, and prior to such
acquisition a majority of the Incumbent Board approves a resolution providing
expressly that such Business Combination does not constitute a Change in Control
under this paragraph (3); or
(4) the shareholders of the Company approve a plan of complete
liquidation or dissolution of the Company or the sale or other
disposition of all or substantially all of the assets of the
Company and its subsidiaries, other than a sale or disposition
of assets to a subsidiary of the Company.
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any person acquires beneficial ownership of more than
33 1/3% of the Company Voting Securities as a result of the acquisition of
Company Voting Securities by the Company which, by reducing the number of
Company Voting Securities outstanding, increases the percentage of shares
beneficially owned by such person; provided, that if a Change in Control
would occur as a result of such an acquisition by the Company (if not for
the operation of this sentence), and after the Company's acquisition such
person becomes the beneficial owner of additional Company Voting
Securities that increases the percentage of outstanding Company Voting
Securities beneficially owned by such person, a Change in Control shall
then occur.
For purposes of this Section 8 only, the term "subsidiary" means a
corporation of which the Company owns directly or indirectly 50% or more
of the voting power.
(d) Termination At End of Normal Term. In the event that either party
hereto exercises its right under Section 2 hereof to give notice of
non-renewal of this Agreement and Employee's employment terminates
at the end of the Normal Term, Employee shall not be entitled to any
severance pay.
(e) Other Terminations. In the event of termination of Employee's
employment hereunder for any reason other than those specified in
subsections (b) through (d) of this Section 8, Employee shall not be
entitled to any severance pay, except as otherwise provided in any
applicable benefit plans of Employer that cover Employee.
<PAGE>8
(f) Accrued Rights. Notwithstanding the foregoing provisions of this
Section 8, in the event of termination of Employee's employment
hereunder for any reason, Employee shall be entitled to payment of
any unpaid portion of his base salary, computed on a pro-rata basis
through the effective date of termination, and payment of any
amounts due to him under the terms of any incentive bonus, stock
option, or employee benefit plan or program of Employer.
(g) Conditions to Severance Benefit.
(i) As conditions of Employee's continued entitlement to the
severance payments provided by this Section 8, Employee is
required to honor in accordance with their terms the
provisions of Section 9, 10, 11, and 12 hereof. In the event
that Employee fails to abide by the foregoing, all payments to
which Employee may otherwise have been entitled under this
Section 8 shall immediately terminate and be forfeited, and
any portion of the base salary continuation payments that may
have been paid to Employee shall forthwith be returned to
Employer. The parties hereto agree that Employee is under no
affirmative obligation to seek to mitigate or offset the
severance payments provided by this Section 8.
(ii) For purposes only of this Section, Employee shall be treated
as having failed to honor the provisions of Sections 9, 10,
11, or 12 hereof only upon the vote of a majority of the Board
following notice of the alleged failure by Employer to
Employee, an opportunity for Employee to cure the alleged
failure within a period of thirty (30) days from the date of
such notice and an opportunity for Employee to be heard on the
issue by the Board.
(h) Potential Excise Taxes. Should any payments made or benefits
provided to Employee under this Agreement be subject to an excise
tax pursuant to Section 4999 of the Internal Revenue Code or any
successor or similar provision thereto, or comparable state or local
tax laws, Employer shall pay to Employee such additional
compensation as is necessary (after taking into account all federal,
state, and local income taxes payable by Employee as a result of the
receipt of such compensation) to place Employee in the same after-tax
position he would have been in, had no such excise tax (or any
interest or penalties thereon) been paid or incurred. Employer
shall pay such additional compensation upon the earlier of: (i) the
time at which Employer withholds such excise tax from any payments
to Employee; or (ii) thirty (30) days after Employee notifies
Employer that Employee has filed a tax return which takes the
position that such excise tax is due and payable in reliance on a
written opinion of Employee's tax advisor that it is more likely
than not that such excise tax is due and payable. If Employee makes
any additional payment with respect to any such excise tax as a
result of an adjustment to Employee's tax liability by any federal,
state, or local authority, Employer shall pay such additional
compensation within
<PAGE>9
thirty (30) days after Employee notifies Employer of such payment.
9. Confidentiality. Employee agrees that he will not at any time during the
term herof or thereafter for any reason, in any fashion, form, or manner,
either directly or indirectly, divulge, disclose, or communicate to any
person, firm, corporation, or other business entity, in any manner
whatsoever, any confidential information or trade secrets concerning the
business of Employer (including the business of any unit thereof),
including, without limiting the generality of the foregoing, the
confidential information described in Exhibit A, which is attached hereto
and incorporated herein by reference. Employee hereby acknolwedges and
agrees that the prohibition against disclosure of confidential information
recited herein is in addition to, and not in lieu of, any rights or
remedies which Employer may have available pursuant to the laws of any
jurisdiction or at common law to prevent the disclosure of confidential
information or trade secrets, and the enforcement by Employer of its
rights and remedies pursuant to this Agreement shall not be construed as
a waiver of any other rights or available remedies which it may possess in
law or equity absent this Agreement.
10. Property of Employer. Employee acknowledges that from time to time in the
course of providing services pursuant to this Agreement he shall have the
opportunity to inspect and use certain property, both tangible and
intangible, of Employer, and Employee hereby agrees that said property
shall remain the exclusive property of Employer, and Employee shall have
no right or proprietary interest in such property, whether tangible or
intangible, including, without limitation, Employer's customer and
supplier lists, contract forms, books of account, computer programs, and
similar property.
11. Non-Competition. Employee agrees that he shall not, during the Employment
Period and for a period of two (2) years after the termination or end
thereof, directly or indirectly compete with Employer by engaging in the
activities set forth in Exhibit B, which is attached hereto and
incorporated herein by reference (the "Prohibited Activities"), within the
geographic area which is set forth on Exhibit C, which is attached hereto
and incorporated herein by reference (the "Restricted Area"). For
purposes of this Section 11, Employee recognizes and agrees that Employer
conducts and will conduct business in the entire Restricted Area and that
Employee will perform his duties for Employer within the entire Restricted
Area. Employee shall be deemed to be engaged in and carrying on said
Prohibited Activities if he engages in said activities in any capacity
whatsoever, including, but not limited to, by or through a partnership of
which he is a general or limited partner or an employee engaged in said
activities, or by or through a corporation or association of which he owns
five percent (5%) or more of the stock or of which he is an officer,
director, employee, member, represnetative, joint venturer, independent
contractor, consultant, or agent who is engaged in said activities.
Employee agrees that during the two (2) year period described above, he
will notify Employer of the name and address of each Employer with whom he
has accepted employment during said period and provide a description of
his position and duties. Such notification shall be made in writing
within thirty (30) days after Employee accepts any such employment.
<PAGE>10
12. Non-Solicitation of Employees. Employee agrees that he shall not, during
the Employment Period and for a period of two years after the termination
thereof, for any reason, directly or indirectly induce or attempt to
induce any employee of Employer to terminate his or her employment.
Employee also will not, without prior written consent of Employer, offer
employment either on behalf of himself or on behalf of any other
individual or entity to any employee of Employer or to any terminated
employee of Employer during the Employment Period and for a period of two
years after the termination thereof for any reason.
13. Breach of Restrictive Covenants. The parties agree that a breach or
violation of Sections 9, 10, 11, or 12 hereof will result in immediate and
irreparable injury and harm to Employer, who shall have, in addition to
any and all remedies of law and other consequences under this Agreement,
the right to an injunction, specific performance or other equitable relief
to prevent the violation of the obligations hereunder.
14. Option Agreement Amendments.
(i) Notwithstanding the provisions of Section 16 of this Agreement, the
provisions of any Stock Option/Non-Compete Agreements between the
Employer and Employee which pre-date this Agreement are amended by
this Agreement as follows:
(a) the definition of Change in Control in any Stock Option/Non-
Compete Agreement is deleted and the definition of Change in
Control contained in Section 8 of this Agreement is
substituted; and
(b) the provisions in Section 3C Additional Compensation in any
Stock Option/Non-Compete Agreement is deleted from such Stock
Option/Non-Compete Agreement.
(ii) In the event of a Change in Control as defined in Section 8, all
unexercised stock options previously granted to Employee shall vest
and become immediately exercisable in full and Employee shall be
entitled to exercise any such rights for the longest period that
could be granted to Employee under the terms of such plan.
15. Notices. Any notice required to be given pursuant to the provisions of
this Agreement shall be in writing and delivered personally or sent by
registered or certified mail, return receipt requested, or by a nationally
recognized overnight courier service, postage or delivery prepaid, to the
party named at the address set forth below, or at such other address as
each party may hereafter designate in a written notice to the other party
delivered in accordance with the terms of this Section 15:
Employer: Policy Management Systems Corporation
One PMS Center
Blythewood, SC 29016
Attention: ____________________
<PAGE>11
Employee: _____________________________
_____________________________
_____________________________
Any such notices shall be deemed to have been delivered when served
personally or, in the case of Notices sent by registered or certified mail
or courier, upon signature acknowledging receipt thereof.
16. Entire Agreement.
(a) Change, Modification, Waiver. No change or modification of this
Agreement shall be valid unless it is in writing and signed by each
of the parties hereto. No waiver of any provision of this Agreement
shall be valid unless it is in writing and signed by the party
against whom the waiver is sought to be enforced. The failure of a
party to insist upon strict performance of any provision of this
Agreement in any one or more instances shall not be construed as a
waiver or relinquishment of the right to insist upon strict
compliance with such provision in the future.
(b) Integration of All Agreements. This Agreement constitutes the
entire Agreement between the parties hereto with regard to the
subject matter hereof, and there are no agreements, understandings,
specific restrictions, warranties, or representations relating to
said subject matter between the parties other than those set forth
herein or herein provided for.
(c) Severability of Provisions. In the event that any one or more of
the provisions of this Agreement or any word, phrase, clause,
sentence, or other portion thereof (including without limitation the
geographical and temporal restrictions contained herein) shall be
deemed to be illegal or unenforceable for any reason, such provision
or portion thereof shall be modified or deleted in such a manner so
as to make this Agreement as modified legal and enforceable to the
fullest extent permitted under applicable laws.
17. Assignment. The rights, duties, and obligations under this Agreement may
not be assigned by either party, except that if there is a Change in
Control as defined in Section 8, Employer may assign its rights and
obligations hereunder to the person, corporation, partnership, or other
entity which has gained such control. In addition, this Agreement shall
be assignable by Employer to any entity acquiring all or substantially all
of the assets of Employer. The provisions of this Agreement shall be
binding on any such assignee.
18. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the state of South Carolina.
<PAGE>12
19. Miscellaneous.
(a) Form. As employed in this Agreement, the singular form shall
include, if appropriate, the plural.
(b) Headings. The headings employed in this Agreement are solely for
the convenience and reference of the parties and are not intended to
be descriptive of the entire contents of any paragraph and shall not
limit or otherwise affect any of terms, provisions, or construction
thereof.
20. Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall take effect as an original and all of which shall
evidence one and the same Agreement.
IN WITNESS WHEREOF, this Agreement is executed as of the date first above
written.
EMPLOYER:
EMPLOYEE:
<PAGE>13
EXHIBIT A
CONFIDENTIAL INFORMATION
1. All software/systems (including all present, planned, and future software)
whether licensed or unlicensed, developed by or on behalf of, or otherwise
acquired by Policy Management Systems Corporation or any of its
subsidiaries.
"All software/system" shall mean:
all code in whatever form
all data pertaining to the architecture and design of such software systems
all documentation in whatever form
all flowcharts
any reproduction or recreation in whole or in part of any of the above in
whatever form.
2. All business plans and strategies including:
strategic plans
product plans
marketing plans
financial plans
operating plans
resource plans
all research and development plans including all data produced by such
efforts.
3. Internal policies, procedures, methods, and approaches which are unique to
Policy Management Systems Corporation and are non-public.
4. Any information relating to the employment, job responsibility,
performance, salary, and compensation of any present or future officer
or employee of Policy Management Systems Corporation.
<PAGE>14
EXHIBIT B
Acting in any capacity, either individually or with any corporation,
partnership, or other entity, directly or indirectly, in providing, or
proposing to provide,data processing software systems,related automation
support services and information services to the insurance industry, including,
but not limited to,application software, processing, consulting, and related
services, in the performance of any of the following types of duties in any
part of the insurance industry:
1. The performance of the sales and marketing functions.
2. The responsibility for sales revenue generation.
3. The responsibility for customer satisfaction.
4. The responsibility for research and development of insurance database
products.
5. The responsibility for the research and development of information data
processing systems
and services.
6. The providing of input to pricing of products.
7. The planning and management of data processing services resources.
8. The coordination of the efforts of the various aspects of computer systems
services
organizations with other functions.
9. The planning and management of information services resources.
10. The providing and management of an operations staff to support the above
listed activities.
<PAGE>15 EXHIBIT C
RESTRICTED AREA
Fifty mile radius of the city limits of the following cities:
Toronto, Canada Birmingham, Alabama
Columbus, Ohio Minneapolis, Minnesota
Cincinnati, Ohio San Diego, California
Chicago, Illinois Melbourne, Australia
Dallas/Fort Worth, Texas Indianapolis, Indiana
Los Angeles, California St. Paul, Minnesota
Boston, Massachusetts Denver, Colorado
Philadelphia, Pennsylvania Mobile, Alabama
Hartford, Connecticut Seattle, Washington
San Francisco, California Bloomington, Illinois
New York City, New York Des Moines, Iowa
Columbia, South Carolina San Juan, Puerto Rico
Sydney, Australia El Paso, Texas
Honolulu, Hawaii Detroit, Michigan
Jacksonville, Florida Phoenix, Arizona
Milwaukee, Wisconsin San Antonio, Texas
Montreal, Canada Baltimore, Maryland
Kansas City, Missouri San Jose, California
Stanford, Connecticut Memphis, Tennessee
<PAGE>16
EXHIBIT C CONTINUED
Oklahoma City, Oklahoma Washington, D.C.
Atlanta, Georgia New Orleans, Louisiana
Houston, Texas London, England
Miami, Florida Paris, France
Princeton, New Jersey St. Louis, Missouri
Cleveland, Ohio Nashville, Tennessee
<PAGE>1
STOCK OPTION/NON-COMPETE AGREEMENT
THIS EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT ("the Agreement") is made
effective as of October 22, 1996, by and between Stephen G. Morrison
("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 October 22, 1996, PMSC grants EMPLOYEE "non-qualified"
Options to purchase up to 20,000 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.
<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., $35.00. 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 October 22, 1997; 40% will be available
for exercise beginning October 22, 1998; 60% will be available for
exercise beginning October 22, 1999; 80% will be available for exercise
beginning October 22, 2000; and 100% will be available for exercise
beginning October 22, 2001 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
<PAGE>3
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.
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
<PAGE>4
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 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 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).
Notwithstanding any other provision of this Agreement, nothing in
this provision or Agreement shall prohibit EMPLOYEE from returning to
the practice of law at any time or any place.
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, with the
exception of Carol Collier-Plexico, 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, <PAGE>5
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 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 incure 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
<PAGE>6
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.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as
of the date first above written.
POLICY MANAGEMENT SYSTEMS CORPORATION
"PMSC"
BY: _________________________________
G. Larry Wilson
TITLE: President
EMPLOYEE
_____________________________________
(Signature)
_____________________________________
(Type or Print Name)
_____________________________________
(Date Signed by Employee)<PAGE>
<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.
<TABLE>
<CAPTION>
Exhibit 11
Statement Regarding Computation of Per Share Earnings
Year Ended December 31,
1996 1995 1994
(In Thousands, Except Per Share Data)
<S> <C> <C> <C>
Primary net income per share
Net income:
Net income as reported $45,997 $ 3,139 $(9,658)
Weighted average number
of common shares
outstanding 18,604 19,391 20,865
Common stock equivalents
- - -
Primary shares 18,604 19,391 20,865
Primary net income per share $ 2.47 $ .16 $ (.46)
Fully diluted net income per share
Net income as reported $45,997 $ 3,139 $(9,658)
Weighted average number
of common shares
outstanding 18,604 19,391 20,865
Common stock equivalents 219 1,120 878
Fully diluted shares 18,823 20,511 21,743
Fully diluted net income
per share $ 2.44 $ .15 $ (.44)
</TABLE>
[DESCRIPTION] EXHIBIT 21
POLICY MANAGEMENT SYSTEMS CORPORATION'S
As of 12/31/96
SUBSIDIARY JURISDICTION OF INCORPORATION
NAME OR ORGANIZATION
PMSI, L.P. Texas Limited
Partnership
Cybertek Solutions, L.P. Texas Limited
Partnership
Policy Management Corporation South Carolina
Policy Management Systems International, Ltd. Delaware
ViLink Corporation Delaware
Policy Management Systems Canada, Ltd. Canada
CYBERTEK Corporation Texas
Policy Management Systems Investment, Inc. Delaware
Policy Management Systems (Germany) GmbH Germany
Policy Management Systems (Barbados), Ltd. Barbados
Policy Management Systems osterreich GmbH Austria
Policy Management Systems Norden A.S. Norway
PMS Asia-Pacific Pty Limited Australia
PMS Creative Limited United Kingdom
PMS Asia Pacific Limited Hong Kong
Information Services Holding, Inc. Delaware
Life Software Holding, Inc. Delaware
Software Services Holding, Inc. Delaware
PMS micado Software Consult GmbH Germany
Policy Management Systems Norden Aktiebolag Sweden
Policy Management Systems Norden Anpartsselskap Denmark
Creative Computer Systems Pty Limited Australia
Creative Solutions BV The Netherlands
Creative Software Development Limited United Kingdom
PMS Creative SA (Proprietary) Limited South Africa
Creative Insurance Services Limited United Kingdom
Policy Management Systems Europe, Limited United Kingdom
PMS micado ProduktSysteme Gesellschaft fur EDVVetrieb mbH Germany
Software Consult micado AG Germany
Portsmouth I.T. Services Limited United Kingdom
PMS Asia-Pacific (NZ) Limited New Zealand
Policy Management Systems India (P) Limited India
<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 7, 1997 on our
audits of the consolidated financial statements and financial statement
schedule of the Company as of December 31, 1996 and 1995 and for each of the
three years in the period ended December 31, 1996, which report is included in
this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Atlanta, Georgia
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS OF
POLICY MANAGEMENT SYSTEMS CORPORATION AS OF AND FOR THE YEAR ENDED DECEMBER 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 22121
<SECURITIES> 2234
<RECEIVABLES> 116113
<ALLOWANCES> 883
<INVENTORY> 0
<CURRENT-ASSETS> 173034
<PP&E> 238219
<DEPRECIATION> 122462
<TOTAL-ASSETS> 572218
<CURRENT-LIABILITIES> 112636
<BONDS> 0
0
0
<COMMON> 182
<OTHER-SE> 363070
<TOTAL-LIABILITY-AND-EQUITY> 572218
<SALES> 0
<TOTAL-REVENUES> 581909
<CGS> 0
<TOTAL-COSTS> 507184
<OTHER-EXPENSES> 2677
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4993
<INCOME-PRETAX> 72048
<INCOME-TAX> 26051
<INCOME-CONTINUING> 45997
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45997
<EPS-PRIMARY> 2.47
<EPS-DILUTED> 0
</TABLE>
