1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1997 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 (IRS Employer
of incorporation) Identification No.)
One PMSC Center (PO Box Ten)
Blythewood, SC (Columbia, SC) 29016 (29202)
- -------------------------------- --------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (803) 735-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
-------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
18,219,825 Common shares, $.01 par value, as of August 8, 1997
The information furnished herein reflects all adjustments which are, in
the opinion of management, necessary for the fair presentation of the results
for the periods reported. Such information should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended December 31, 1996.
<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Income for the Three and
Six Months ended June 30, 1997 and 1996 3
Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996 4
Consolidated Statements of Cash Flows for the Six
Months ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 4. Submission of Matters to a
Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
<PAGE>
<TABLE>
<CAPTION>
PART I
FINANCIAL INFORMATION
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
(Unaudited)
- -------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Revenues
Licensing $ 32,309 $ 25,838 $ 58,527 $ 50,133
Services. . . . . . . . . . . . . . 132,491 111,494 261,529 220,382
--------- --------- --------- ---------
164,800 137,332 320,056 270,515
--------- --------- --------- ---------
Operating expenses
Cost of revenues
Employee compensation & benefits . 55,351 42,405 106,598 84,331
Computer and communications
expenses 8,792 8,096 17,302 16,071
Information services and
data acquisition costs 30,950 29,871 61,464 57,909
Depreciation and amortization of
property, equipment and
capitalized software costs 14,308 11,839 28,367 22,973
Other costs & expenses 11,713 9,122 20,058 15,750
Selling, general and administrative
expenses. . . . . . . . . . . . . 23,222 17,675 46,539 34,592
Amortization of goodwill and
other intangibles 2,647 2,617 5,329 5,160
Litigation settlement and
expenses, net - (9,358) - (9,422)
--------- --------- --------- ---------
146,983 112,267 285,657 227,364
--------- --------- --------- ---------
Operating income . . . . . . . . . . 17,817 25,065 34,399 43,151
Equity in earnings of
unconsolidated affiliate 321 - 690 -
Other Income and Expenses
Investment income 344 926 771 1,522
Interest expense and other
charges (1,356) (1,358) (2,573) (2,069)
--------- --------- --------- ---------
(1,012) ( 432) (1,802) ( 547)
--------- --------- --------- ---------
Income before income taxes . . . . . 17,126 24,633 33,287 42,604
Income taxes 6,432 8,830 12,501 15,173
--------- --------- --------- ---------
Net income $ 10,694 $ 15,803 $ 20,786 $ 27,431
========= ========= ========= =========
Net income per share $ .59 $ .85 $ 1.14 $ 1.44
========= ========= ========= =========
Weighted average number of shares 18,187 18,604 18,183 19,034
<FN>
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
June 30, December 31,
1997 1996
- ------------------------------------------------------------------------------
(In Thousands,
Assets Except Share Data)
<S> <C> <C>
Current assets
Cash and equivalents $ 9,626 $ 22,121
Marketable securities 2,496 2,234
Receivables, net of allowance for uncollectible
amounts of $764 ($883 at 1996) 132,060 116,113
Income tax receivable. . . . . . . . . . . . . . 1,365 1,383
Deferred income taxes 15,447 15,343
Other 17,333 15,840
--------- --------
Total current assets 178,327 173,034
Property and equipment, at cost less accumulated
depreciation and amortization of $132,055
($122,462 at 1996) 116,802 115,757
Receivables . . . . . . . . . . . . . . . . . . . 3,639 4,866
Income tax receivable 4,041 4,041
Goodwill and other intangibles, net . . . . . . . 75,541 83,363
Capitalized software costs, net 189,438 177,875
Deferred income taxes 1,241 1,560
Investments 6,442 6,483
Other 4,566 5,239
--------- --------
Total assets $580,037 $572,218
========= ========
Liabilities
Current liabilities
Accounts payable and accrued expenses $ 52,077 $ 61,435
Accrued restructuring charges. . . . . . . . . . 647 2,478
Accrued contract termination costs 1,022 407
Current portion of long-term debt. . . . . . . . 26,191 31,222
Income taxes payable 8,604 6,623
Unearned revenues 9,556 9,840
Other 494 631
--------- --------
Total current liabilities 98,591 112,636
Long-term debt 34,010 34,268
Deferred income taxes . . . . . . . . . . . . . . 63,184 58,370
Accrued restructuring charges 964 1,340
Other . . . . . . . . . . . . . . . . . . . . . . 3,253 2,352
--------- --------
Total liabilities 200,002 208,966
--------- --------
Commitments and contingencies (Note 1)
Stockholders' Equity
Special stock, $.01 par value, 5,000,000 shares
authorized - -
Common stock, $.01 par value, 75,000,000 shares
authorized, 18,198,189 shares issued and
outstanding (18,179,186 at December 31, 1996). . 182 182
Additional paid-in capital 106,795 106,104
Retained earnings . . . . . . . . . . . . . . . . 276,896 256,110
Foreign currency translation adjustment (3,838) 856
--------- --------
Total stockholders' equity. . . . . . . . . . 380,035 363,252
--------- --------
Total liabilities and stockholders' equity $580,037 $572,218
========= ========
<FN>
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
1997 1996
- --------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Operating Activities
Net income $ 20,786 $ 27,431
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization. . . . . . . . 35,063 29,596
Deferred income taxes 4,999 12,106
Provision for uncollectible accounts 1,516 148
Impairment and restructuring charges 444 -
Changes in assets and liabilities:
Accrued restructuring and lease
termination costs ( 2,207) ( 5,384)
Receivables (16,236) ( 8,585)
Income taxes receivable 18 192
Accounts payable and accrued expenses ( 9,358) (21,677)
Income taxes payable 1,981 5,449
Other, net 17 ( 1,889)
--------- ---------
Cash provided by operations 37,023 37,387
--------- ---------
Investing Activities
Proceeds from sales/maturities of marketable
securities 250 2,450
Acquisition of property and equipment (16,428) (12,897)
Capitalized internal software development
costs . . . . . . . . . . . . . . . . . . . . (29,623) (26,718)
Purchased software - ( 1,040)
Proceeds from disposal of property and
equipment 805 685
--------- ---------
Cash used by investing activities (44,996) (37,520)
--------- ---------
Financing Activities
Payments on long-term debt (77,427) (63,393)
Repurchase of common stock - (73,595)
Proceeds from borrowing under credit facility 72,138 113,500
Issuance of common stock under stock
option plans 691 6,248
--------- ---------
Cash used by financing activities ( 4,598) (17,240)
--------- ---------
Effect of exchange rate changes on cash 76 169
Net decrease in cash and
equivalents (12,495) (17,204)
Cash and equivalents at beginning of period 22,121 35,094
--------- ---------
Cash and equivalents at end of period $ 9,626 $ 17,890
========= =========
Supplemental Information
Interest paid $ 2,212 $ 1,116
Income taxes paid(refunded) 3,790 ( 3,425)
<FN>
See accompanying notes
</TABLE>
<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 1. CONTINGENCIES
In June 1993, the Securities and Exchange Commission ("SEC") commenced a
formal investigation into possible violations of the Federal securities laws
in connection with Policy Management Systems Corporation's ("Company") public
reports and financial statements, as well as trading in the Company's
securities.
On July 22, 1997, the Company announced a settlement with the SEC that
closed the investigation of the Company's 1990 to 1993 financial statements
and reports. The settlement became effective on July 22 simultaneously with
the filing of an SEC civil complaint in the U.S. District Court for the
District of South Carolina. In consenting to the settlement, the Company
neither admitted nor denied the SEC allegations of reporting, books and
records, and internal control violations. The key provisions of the settlement
are an injunction requiring future compliance with the federal securities
laws, payment by the Company of a $1 million civil penalty and payments by
five current and former officers of $20,000 civil penalties.
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 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. As a
result of post trial motions, the judgment was amended to delete the award of
pre-judgment interest and SLD was ordered to return the Company's systems.
Both the Company and SLD have appealed to the United States Court of Appeals.
Changes in the status of this proceeding could result in a change in
subsequent periods in the Company's estimate of anticipated liability for the
costs associated with these matters.
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 and the SLD lawsuit,
the Company's insurer, St. Paul Mercury Insurance Company ("St. Paul"),in June
1995 commenced 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 both matters, coverage
for damages, if any, awarded in those matters, and consequential and punitive
damages.
In connection with the dismissal of the prior lawsuit, St. Paul and the
Company agreed to dismiss with prejudice all claims against each other with
respect to the matter, and St. Paul agreed to reimburse the Company for the
Company's legal fees. 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.
NOTE 2. PREPARATION OF INTERIM FINANCIAL STATEMENTS
The consolidated financial statements of Policy Management Systems
Corporation have been prepared in accordance with the rules and regulations of
the SEC. These consolidated financial statements include estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the amounts of revenues
and expenses. Actual results could differ from those estimated. In the
opinion of management, these statements include all adjustments necessary for
a fair presentation of the results of all interim periods reported herein. All
adjustments are of a normal recurring nature unless otherwise disclosed.
Certain information and footnote disclosures prepared in accordance with
generally accepted accounting principles have been either condensed or omitted
pursuant to SEC rules and regulations. However, management believes that the
disclosures made are adequate for a fair presentation of results of
operations, financial position and cash flows. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and accompanying notes included in the Company's latest annual
report on Form 10-K.
NOTE 3. 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 and
earlier application is not permitted. The Company will adopt FAS 128 on its
effective date. Pro forma earnings per share of the Company computed using
FAS 128 is not different from earnings per share computed using existing
standards and guidelines.
In June 1997, Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("FAS 130") was issued. FAS 130 establishes
standards for reporting and display of comprehensive income and its
components. FAS 130 is effective for fiscal years beginning after December
15, 1997. The effect on the Company's financial statements will be immaterial.
The Company will adopt FAS 130 on its effective date.
In June 1997, Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131") was issued. FAS 131 is designed to improve the information provided in
financial statements about the different types of business activities in which
the enterprise engages and economic environments in which the enterprise
operates. FAS 131 is effective for fiscal years beginning after December 15,
1997. Earlier application is encouraged. The Company does not believe the
adoption of FAS 131 will have a material impact on its financial statements.
NOTE 4. RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to current
year presentation.
<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's consolidated results of operations and financial condition. The
discussion should be read in conjunction with the consolidated financial
statements and notes thereto contained in Part I of this report on Form 10-Q
and with the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
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>
1997 vs. 1996
Percent
Percentage of Revenues Increase (Decrease)
---------------------------- ------------------
Three Six Three Six
Months Ended Months Ended Months Months
June 30, June 30, Ended Ended
-------------- -------------
1997 1996 1997 1996 June 30
----- ------ ----- ----- -----------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Licensing 19.6% 18.8% 18.3% 18.5% 25.0% 16.7%
Services 80.4 81.2 81.7 81.5 18.8 18.7
------ ------ ------ ------
100.0 100.0 100.0 100.0 20.0 18.3
Operating expenses
Cost of revenues
Employee compensation and benefits 33.6 30.9 33.3 31.2 30.5 26.4
Computer & communication expenses 5.3 5.9 5.4 5.9 8.6 7.7
Information services & data
acquisition costs 18.8 21.8 19.2 21.4 3.6 6.1
Depreciation & amortization
of property, equipment &
capitalized software costs 8.7 8.6 8.9 8.5 20.9 23.5
Other costs & expenses 7.1 6.6 6.3 5.8 28.4 27.9
Selling, general &
administrative expenses 14.1 12.9 14.5 12.8 31.4 34.5
Amortization of goodwill and
other intangibles 1.6 1.9 1.7 1.9 1.1 3.3
Litigation settlement and
expenses, net - (6.8) - (3.5) - -
------ ------ ------ ------
89.2 81.8 89.3 84.0 30.9 25.7
Operating income . . . . . . . . . . 10.8 18.2 10.7 16.0 (28.9) (20.4)
Equity in earnings of unconsolidated
affiliate 0.2 - 0.2 - - -
Other income and expenses (0.6) (0.3) (0.6) (0.2) - -
------ ------ ------ ------
Income before income taxes 10.4 17.9 10.3 15.8 (30.5) (22.0)
Income taxes 3.9 6.4 3.9 5.6 (27.2) (17.6)
------ ------ ------ ------
Net income 6.5% 11.5% 6.4% 10.2% (32.3)% (24.4)%
====== ====== ====== ======
</TABLE>
<PAGE>
THREE MONTHS COMPARISON
Comparisons of revenues, operating income and margins for each business
unit for the periods presented are as follows:
<TABLE>
<CAPTION>
Three Months
Ended June 30,
REVENUES 1997 1996 Change
- -----------------------------------------------------------------------
(Dollars in Millions)
<S> <C> <C> <C>
Enterprise Software and Services
Property & Casualty $ 55.8 $ 47.5 17.4 %
Life 29.6 19.9 48.6
Information Services
Property & Casualty 23.5 22.2 6.1
Life 13.8 14.0 (2.0)
------- ------- --------
Total U.S. revenues 122.7 103.6 18.4
International 42.1 33.7 25.0
------- ------- --------
Total revenues $164.8 $137.3 20.0 %
========================================= ======= ======= ========
OPERATING INCOME
- -----------------------------------------
Enterprise Software and Services
Property & Casualty $ 13.3 $ 12.7 5.4 %
Life 7.6 4.5 67.0
Information Services
Property & Casualty 0.1 0.3 ( 65.2)
Life 0.8 0.8 0.9
Corporate (7.4) 3.8* (297.5)
------- ------- --------
Total U.S. operating income 14.4 22.1 ( 34.9)
International 3.4 3.0 14.3
------- ------- --------
Total operating income $ 17.8 $ 25.1 ( 28.9)%
========================================= ======= ======= ========
OPERATING INCOME AS PERCENTAGE OF REVENUE
- -----------------------------------------
Enterprise Software and Services
Property & Casualty 23.9% 26.7%
Life 25.5 22.7
Information Services
Property & Casualty 0.4 1.3
Life 5.8 5.6
------- -------
Total U.S 11.7 21.3
International 8.2 9.0
------- -------
Total 10.8% 18.2%
========================================= ======= =======
<FN>
*Corporate operating income includes a special credit of $9.4 million.
</TABLE>
<PAGE>
REVENUES
Three Months
Ended June 30,
Licensing 1997 1996 Change
- ---------------------------------------------------------------
(Dollars in Millions)
Initial charges $ 16.6 $ 12.0 37.6%
Monthly charges 15.7 13.8 14.1
- --------------------------------------------------------------
$ 32.3 $ 25.8 25.0%
===============================================================
Percentage of total revenues 19.6% 18.8%
- ------------------------------------------------------
Initial license revenues increased $4.6 million from the second quarter
of 1996 to the second quarter of 1997, with the following increases by
business unit: domestic property and casualty up 2.5% ($0.1 million); life
insurance and financial solutions up 47.6% ($2.4 million); and international
up 56.2% ($2.1 million).
Property and casualty licensing revenues in the United States are being
impacted by various market factors. Prospective customers are expressing a
desire for a Windows NT version of Series III in a client server environment.
The Company believes the market priority is for personal lines functionality
in a Windows NT environment. The first release of Series III with Windows NT
functionality is currently scheduled to be available by year end. This
release will support most personal lines functionality with additional
personal lines and commercial lines functionality scheduled for subsequent
releases. The Company's operating results could be negatively impacted if the
Company experiences delays in delivering Windows NT to its customers.
Additionally, many insurance companies are spending significant amounts of
money to solve their year 2000 problems. To date, the Company does not
believe it has experienced a significant impact, positively or negatively,
from year 2000 issues and at this time is unable to predict what the future
impact, if any, will be.
Initial license charges for the second quarter of 1997 include right-to-use
charges (licenses excluding further MESA obligations) of $1.4 million compared
to $1.7 million for the same period of 1996. Initial license charges for the
second quarter of 1997 do not include any termination charges (related to the
buyout of monthly license charges). Also, during the second quarter of 1997,
the property and casualty unit executed a license agreement covering a package
of several of the Company's information access and electronic commerce
software products for $1.75 million with Insurance Information Exchange L.L.C.
(iiX). This license was signed concurrently with the execution of an agreement
which should ultimately lead to iiX acquiring the Company's property and
casualty information services unit.
Monthly license charges increased $1.9 million from the second quarter of
1996 to the second quarter of 1997 with the following increases by business
unit: domestic property and casualty up 3.5% ($0.3 million); life insurance
up 48.6% ($1.0 million); and international up 25.1% ($0.6 million). The
increase in international is principally related to an increase in licensing
activities due to the acquisition of Co-Cam in August 1996.
Because a significant portion of initial licensing revenues are recorded at
the time new systems are licensed, there can be significant fluctuations in
revenue from quarter to quarter. Set forth below is a comparison of initial
license revenues for the last eight quarters expressed as a percentage of
total revenues for each of the periods presented:
1997 1996 1995
----------- ------------------------- -----------
2nd 1st 4th 3rd 2nd 1st 4th 3rd
------------ ------------------------- -----------
(Dollars in Millions)
Initial license revenues $16.6 $11.3 $19.4 $10.1 $12.0 $10.4 $16.1 $11.3
% of total revenues 10.0% 7.3% 11.8% 6.9% 8.8% 7.8% 11.6% 8.6%
Three Months
Ended June 30,
Services 1997 1996 Change
- ------------------------------------------------------------
(Dollars In Millions)
Professional and outsourcing $ 90.3 $ 70.6 27.9%
Information 41.0 40.0 2.4
Other 1.2 0.9 483.3
- ------------------------------------------------------------
$132.5 $111.5 18.8%
============================================================
Percentage of total revenues 80.4% 81.2%
- -------------------------------------------------
Domestic property and casualty professional and outsourcing services revenues
increased 22.2% ($7.6 million) due to increases in implementation services and
increases in processing volumes in the outsourcing areas related to new and
existing customers. International professional and outsourcing services
revenues increased 23.6% ($6.1 million), principally due to services activity
of Co-Cam, acquired in August 1996, and increases in the volume of services
provided to new and existing customers.
Domestic life insurance professional and outsourcing services increased
57.7% ($6.0 million) from the second quarter 1996 to the 1997 second quarter,
due principally to increased volumes of implementation services to new and
existing domestic customers.
Information services revenues increased $1.0 million from the 1996 second
quarter to the 1997 second quarter. This increase is due to an increase in
property and casualty information services revenues of $1.3 million which
consists principally of fees for domestic motor vehicle reports, partially
offset by a decrease of $0.3 million in life insurance information services,
principally comprised of attending physician statements and application
processing services.
<PAGE>
OPERATING EXPENSES
Cost of Revenues
Employee compensation and benefits increased 30.5% for the second quarter
1997 compared with the second quarter of 1996, principally the result of
increased salaries and related costs associated with the acquisition of Co-Cam
in August 1996, and increased costs associated with the growth in staffing for
additional professional services. Compensation and benefits increased 53.4%
($5.6 million) internationally, while domestic increased 23% ($7.4 million).
Computer and communications expenses increased 8.6% ($0.7 million)
principally as a result of 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 3.6%, due
principally to increases in property and casualty information costs arising
from increased volume of motor vehicle reports and in life insurance
information services arising from increased volume of attending physician
statements.
Depreciation and amortization of property, equipment and capitalized
software costs increased 20.9%. This increase is principally due to higher
amortization expense resulting from the 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 (Release 8) client/server
software systems. In addition, depreciation expense increased due to the
Company's increased investment in its information technology equipment and
expanded facilities costs.
Other operating costs and expenses increased 28.4%. This increase is
primarily related to increased fees for the use of consultants and independent
contractors, increased training costs in new technologies and the satisfaction
of staffing needs for certain development and services activities. In
addition, third party commission, rent and other facilities costs rose over
amounts in the same period last year. These increases were offset by an
increase in amounts capitalized principally related to the continued
enhancement and development of the Company's Series III property and casualty
insurance software, CyberLife life insurance software and Insure Plus
international property and casualty software.
Selling, general and administrative expenses
Selling, general and administrative expenses increased 31.4% for the
second quarter of 1997 compared with the second quarter of 1996, principally
because of the Company's investment in its international sales force and
infrastructure, mainly as a result of the August 1996 acquisition of Co-Cam.
However when compared to the fourth quarter of 1996, the increase was only
1.9%.
Litigation settlement and expenses, net
In May 1996, the Company resolved its litigation with the California
State Automobile Association Inter-Insurance Bureau and the California State
Automobile Association ("CSAA"), concluding with 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 gain for this recovery during the
second quarter of 1996.
Amortization of goodwill and other intangibles
The 1.1% increase in amortization of goodwill and other intangibles is
principally the result of amortization of intangible assets related to the
acquisition of Co-Cam in August 1996.
OPERATING INCOME
Second quarter 1997 operating income decreased 28.9% ($7.2 million)
compared with the 1996 second quarter due primarily to a litigation settlement
credit of $9.4 million in 1996. Domestic life insurance operating income
increased 67.0%, property and casualty insurance business increased 5.4% and
international operating income increased 14.3%. The property and casualty
results were negatively impacted due to results in its outsourcing unit in
Florida. The negative impact was due to the fact that in 1996, the state of
Florida legislatively imposed six month homeowner policies as opposed to the
normal twelve months policies. This decision was reversed later that year,
but now has a carryover effect, which may last for several years, which places
most policy renewal dates in the latter part of the year. Since a significant
percentage of the Company's revenue under this contract is derived from
processing renewals, the operating income from this unit declined
significantly versus the second quarter of 1996. In addition, this unit
suffered approximately $1 million in one time operating expenses in the second
quarter of 1997.
OTHER INCOME AND EXPENSE
Interest expense remained relatively unchanged at $1.4 million. The
average nominal interest rate applicable to borrowings under the Company's
credit facilities during the second quarter of 1997 was 6.2%.
INCOME TAXES
The effective income tax rate (income taxes expressed as a percentage of
pre-tax income) was 37.6% and 35.8% for the three months ended June 30, 1997
and 1996, respectively. The effective rate for the second quarter of 1997 is
higher than the federal statutory rate principally due to the effect of state
and local income taxes.
<PAGE>
SIX MONTHS COMPARISON
Comparisons of revenues, operating income and margins for each business
unit for the periods presented are as follows:
<TABLE>
<CAPTION>
Six Months
Ended June 30,
REVENUES 1997 1996 Change
- ----------------------------------------------------------------------
(Dollars in Millions)
<S> <C> <C> <C>
Enterprise Software and Services
Property & Casualty $112.3 $ 94.9 18.4 %
Life 52.9 35.7 48.0
Information Services
Property & Casualty 47.0 44.8 4.9
Life 27.0 27.0 (0.2)
------- -------- -------
Total U.S. revenues 239.2 202.4 18.2
International 80.9 68.1 18.7
------- -------- -------
Total revenues $320.1 $ 270.5 18.3 %
========================================= ======= ======== =======
OPERATING INCOME
- -----------------------------------------
Enterprise Software and Services
Property & Casualty $ 29.0 $ 27.6 4.7 %
Life 11.6 6.9 69.3
Information Services
Property & Casualty 0.3 0.4 (31.1)
Life 1.3 1.3 3.9
Corporate (12.5) (1.5)* 715.8
------- -------- -------
Total U.S. operating income 29.7 34.7 (14.4)
International 4.7 8.5 (44.5)
------- -------- -------
Total operating income $ 34.4 $ 43.2 (20.4)%
========================================= ======= ======== =======
OPERATING INCOME AS PERCENTAGE OF REVENUE
- -----------------------------------------
Enterprise Software and Services
Property & Casualty 25.8% 29.2%
Life 21.9 19.2
Information Services
Property & Casualty 0.6 0.8
Life 5.0 4.8
------- --------
Total U.S 12.4 17.1
International 5.8 12.4
------- --------
Total 10.7% 16.0%
========================================= ======= ========
<FN>
*Corporate operating income includes a special credit of $9.4 million.
</TABLE>
<PAGE>
REVENUES
Six Months
Ended June 30,
Licensing 1997 1996 Change
- ------------------------------------------------------
(Dollars in Millions)
Initial charges $ 27.8 $ 22.4 24.0 %
Monthly charges 30.7 27.7 10.9
- ------------------------------------------------------
$ 58.5 $ 50.1 16.7 %
======================================================
Percentage of total revenues 18.3% 18.5%
- ------------------------------------------------
Initial license charges increased $5.4 million from the first six months
of 1996 to the first six months of 1997, with the following increases or
decreases by business unit: domestic life insurance and financial solutions
up 83.6% ($5.2 million); international up 26.9% ($2.1 million); and domestic
property and casualty down 23.2% ($1.9 million).
Property and casualty licensing revenues in the United States are being
impacted by various market factors. Prospective customers are expressing a
desire for a Windows NT version of Series III in a client server environment.
The Company believes the market priority is for personal lines functionality
in a Windows NT environment. The first release of Series III with Windows NT
functionality is currently scheduled to be available by year end. This
release will support most personal lines functionality with additional
personal lines and commercial lines functionality scheduled for subsequent
releases. The Company's operating results could be negatively impacted if the
Company experiences delays in delivering Windows NT to its customers.
Additionally, many insurance companies are spending significant amounts of
money to solve their year 2000 problems. To date, the Company does not
believe it has experienced a significant impact, positively or negatively,
from year 2000 issues and at this time is unable to predict what the future
impact, if any, will be.
Initial license charges for the first six months of 1997 include
right-to-use charges (licenses excluding further MESA obligations) of $2.6
million compared to $2.8 million for the first six months of 1996. Initial
license charges for the period also include termination charges (related to
the buyout of monthly license charges) of $0.2 million for the first six
months of 1997. Also, during the second quarter of 1997, the property and
casualty unit executed a license agreement covering a package of several of
the Company's information access and electronic commerce software products for
$1.75 million with Insurance Information Exchange L.L.C. (iiX). This license
was signed concurrently with the execution of an agreement which should
ultimately lead to iiX acquiring the Company's property and casualty
information services unit.
Monthly license charges increased $3.0 million from the first six months
of 1996 to the first six months of 1997 with the following increases by
business unit: domestic life insurance up 46.4% ($1.9 million); and
international up 26.3% ($1.3 million). Domestic property and casualty was
relatively unchanged. The increase in international is principally related to
an increase in licensing activities due to the acquisition of Co-Cam in August
1996.
Six Months
Ended June 30,
Services 1997 1996 Change
- -------------------------------------------------------------
(Dollars In Millions)
Professional and outsourcing $177.6 $140.1 26.8%
Information 81.1 78.8 3.0
Other 2.8 1.5 87.5
- -------------------------------------------------------------
$261.5 $220.4 18.7%
=============================================================
Percentage of total revenues 81.7% 81.5%
- ----------------------------------------------------
Domestic property and casualty professional and outsourcing services revenues
increased 27.5% ($18.4 million) due to increases in implementation services
and increases in processing volumes in the outsourcing areas related to new
and existing customers. International professional and outsourcing services
revenues increased 18.5% ($9.8 million), principally due to services activity
of Co-Cam, acquired in August 1996, and increases in the volume of services
provided to new and existing customers.
Domestic life insurance professional and outsourcing services increased 45.5%
($9.3 million) from the second quarter 1996 to the 1997 second quarter, due
principally to increased volumes of implementation services to new and
existing domestic customers.
Information services revenues increased $2.3 million. This increase is due to
an increase in property and casualty information services revenues, which
consists principally of fees for domestic motor vehicle reports.
OPERATING EXPENSES
Cost of Revenues
Employee compensation and benefits increased 26.4% from the first six
months of 1996 to the first six months of 1997, principally the result of
increased salaries and related costs associated with the acquisition of Co-Cam
in August 1996, and increased costs associated with the growth in staffing for
additional professional and outsourcing services. Compensation and benefits
increased 57.1% ($11.5 million) internationally, while domestic increased
16.7% ($10.7 million).
Computer and communications expenses increased 7.7%, principally as a
result of 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 6.1%, due
principally to increases in property and casualty information costs arising
from increased volume of motor vehicle reports and in life insurance
information services arising from increased volume of attending physician
statements.
Depreciation and amortization of property, equipment and capitalized
software costs increased 23.5%. This increase is principally due to higher
amortization expense resulting from the 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 (Release 8) client/server
software systems. In addition, depreciation expense increased due to Company's
increased investment in its information technology equipment.
Other operating costs and expenses increased 27.4%. This increase is
primarily related to increased fees for the use of consultants and independent
contractors, increased training costs in new technologies and the satisfaction
of staffing needs for certain development and services activities. In
addition, third party commissions, rent and other facilities costs rose over
amounts in the same period last year. These increases were offset by an
increase in amounts capitalized principally related to the continued
enhancement and development of the Company's Series III property and casualty
insurance software, CyberLife life insurance software and Insure Plus
international property and casualty software.
Selling, general and administrative expenses
Selling, general and administrative expenses increased 34.5% for the first six
months of 1997 compared with the first six months of 1996, principally because
of the Company's investment in its international sales force and
infrastructure, mainly as a result of the August 1996 acquisition of Co-Cam.
Litigation settlement and expenses, net
In May 1996, the Company resolved its litigation with the California
State Automobile Association Inter-Insurance Bureau and the California State
Automobile Association ("CSAA"), concluding with 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 gain for this recovery during the
second quarter of 1996.
Amortization of goodwill and other intangibles
The 3.3% increase in amortization of goodwill and other intangibles is
principally the result of amortization of intangible assets related to the
acquisition of Co-Cam in August 1996.
OPERATING INCOME
Operating income decreased 20.4% ($8.8 million) due primarily to a
litigation settlement credit of $9.4 million in 1996. Domestic life insurance
operating income increased 69.2% and property and casualty insurance business
increased 4.7% offset by a decrease in international operating income of
44.5%. International operating income is lower than the first six months of
1996 due to the fact that expenses rose faster than revenues, primarily in the
sales, marketing and administrative areas as the Company has built up its
international infrastructure. While comparative results for international are
down versus the first six months of 1996, the operating income has improved
significantly from the fourth quarter of 1996. The property and casualty
results were negatively impacted due to results in its outsourcing unit in
Florida. The negative impact was due to the fact that in 1996, the state of
Florida legislatively imposed six month homeowner policies as opposed to the
normal twelve months policies. This decision was reversed later that year,
but now has a carryover effect, which may last for several years, which places
most policy renewal dates in the latter part of the year. Since a significant
percentage of the Company's revenue under this contract is derived from
processing renewals, the operating income from this unit declined
significantly versus the first six months of 1996. In addition, this unit
suffered approximately $1 million in one time operating expenses in the second
quarter of 1997.
OTHER INCOME AND EXPENSES
As a result of a higher average level of borrowed funds, principally
borrowings under the Company's credit facilities, interest expense increased
$0.5 million. The average nominal interest rate applicable to borrowings under
these facilities during the first six months of 1997 was 6.02%.
Investment income decreased $0.8 million, principally due to a lower
average level of interest-bearing cash equivalents during the first six months
of 1997 as compared to the same period of 1996.
INCOME TAXES
The effective income tax rate (income taxes expressed as a percentage of
pre-tax income) was 37.6% and 35.6% for the six months ended June 30, 1997 and
1996, respectively. The effective rate for the 1997 period is higher than the
federal statutory rate due principally to the effect of state and local income
taxes.
<PAGE>
AGREEMENT WITH IIX
The Company agreed to enter into an agreement with Insurance Information
Exchange, L.L.C. (iiX), that should result in iiX acquiring the Company's
property and casualty information services business.
The Company and iiX expect to close the transaction during August or
September.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
- --------------------------------------------------------
(Dollars in Millions)
<S> <C> <C>
Cash and equivalents, marketable
securities, and investments $ 18.6 $ 30.8
Current assets 178.3 173.0
Current liabilities 98.6 112.6
Working capital 79.7 60.4
Long-term debt 34.0 34.3
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1997 1996
- ----------------------------------------------------------
(Dollars in Millions)
<S> <C> <C>
Cash provided by operations $ 37.0 $ 37.4
Cash used for investing activities (45.0) (37.5)
Cash used for financing activities ( 4.6) (17.2)
</TABLE>
The Company's current ratio (current assets divided by current
liabilities) stood at 1.8 at June 30, 1997, 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 had available under its credit facilities (net of
amounts outstanding at June 30, 1997) $75.0 million under its 364 day $100.0
million facility and $68.0 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 had available an
uncommitted $10.0 million operating line of credit with which it may choose to
fund temporary operating cash needs. On August 8, the Company entered into a
new credit facility for $200 million for five years, which replaces the 364
day and 3 year credit facilities. Additionally, on August 5, the $10.0 million
uncommitted operating line of credit available to the Company has increased to
$15 million.
Cash provided by operations remained relatively unchanged from June 30,
1996 to June 30, 1997.
During the six months ended June 30, 1997 the Company capitalized
software development costs of $29.6 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
Windows NT), CyberLife object-oriented client/server life insurance software,
an Insure Plus international property and casualty solution as well as other
ongoing projects for other domestic as well as international products.
Significant expenditures anticipated for the remainder of 1997, excluding
any possible business acquisitions or common stock repurchases, are as
follows: acquisition of data processing, communications equipment and office
furniture, fixtures and equipment ($15 million); and costs relating to the
internal development of software systems ($30 million).
The Company has historically used the cash generated from operations for
the following: development and acquisition of new products, acquisition of
businesses and repurchase of the Company's stock. The Company anticipates
that it will continue to use its cash for all of these purposes in the future
and that projected cash from operations, cash and investment reserves along
with amounts available under the Company's debt facilities will be sufficient
to meet presently anticipated operating needs and to accomplish specific
objectives in these areas and for other general corporate purposes.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's operating results and financial condition can be impacted
by a number of factors, including, but not limited to, the following, any of
which could cause actual results to vary materially from current and
historical results or the Company's anticipated future results:
- - Currently, the Company's business is focused principally within the global
property and casualty and life insurance industries;
- - There is increasing competition for the Company's products and services;
- - The market for the Company's products and services is characterized by rapid
changes in technology;
- - Contracts with governmental agencies involve a variety of special risks,
including the risk of early contract termination by the governmental agency
and changes associated with newly elected state administrations or newly
appointed regulators;
- - The timing and amount of the Company's revenues are subject to a number of
factors, including, but not limited to, the timing of customers' decisions to
enter into large license agreements with the Company;
- - Unforeseen events or adverse economic or business trends may significantly
increase cash demands beyond those currently anticipated or affect the
Company's ability to generate/raise cash to satisfy financing needs;
- - The Company's operations have not proven to be significantly seasonal,
although quarterly revenues and net income can be expected to vary at times;
- - Although the Company cannot accurately determine the amounts attributable
thereto, the Company has been affected by inflation through increased costs of
employee compensation and other operating expenses.
- - Many of the Company's current and potential customers are or will spend
significant amounts of money to make their existing information systems
capable of handling the year 2000.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during
the reporting period. Changes in the status of certain matters or facts or
circumstances underlying these estimates could result in material changes in
these estimates, and actual results could differ from these estimates.
Because of the foregoing factors, as well as other factors affecting the
Company's operating results, past financial performance should not be
considered to be a reliable indicator of future performance, and investors
should not use historical trends to anticipate results or trends in future
periods.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: Statements in this report that are not descriptions of historical facts
may be forward-looking statements that are subject to risks and uncertainties,
including economic, competitive and technological factors affecting the
Company's operations, markets, products, services and prices, as well as other
specific factors discussed in the Company's filings with the Securities and
Exchange Commission. These and other factors may cause actual results to
differ materially from those anticipated.
<PAGE>
PART II
OTHER INFORMATION
POLICY MANAGEMENT SYSTEMS CORPORATION
ITEM 1. LEGAL PROCEEDINGS
See Note 1, Contingencies, of Notes to Consolidated Financial Statements,
which is incorporated by reference in this Item.
ITEMS 2 AND 3 are not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders, held on May 13, 1997,
the Company's stockholders approved: (i) the election of three directors,
Alfred R. Berkeley, III (14,077,050 votes for and 39,806 abstentions), Donald
W. Feddersen (14,075,998 votes for and 40,858 abstentions) and Richard G. Trub
(14,077,102 votes for and 39,754 abstentions) to serve a term of three years;
and (ii) the ratification of the selection of independent auditors (14,101,552
votes for, 13,274 votes against and 2,030 abstentions).
The following directors' terms continued through the Annual Meeting of
Stockholders, held on May 13, 1997: G. Larry Wilson (Chairman of the Board),
Dr. John M. Palms, John P. Seibels and Joseph D. Sargent.
ITEM 5 IS NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits
Exhibits required to be filed with this Quarterly Report on Form 10-Q are
listed in the following Exhibit Index.
Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
June 30, 1997.
<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POLICY MANAGEMENT SYSTEMS CORPORATION
-------------------------------------
(Registrant)
Date: August 12, 1997: Timothy V. Williams
Executive Vice President
(Chief Financial Officer)
<PAGE>
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)
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)
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 Exhibits 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)
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 10-Q 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 as an Exhibit to Form 10-K for year ended December
31, 1996, and is incorporated herein by reference)
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 as an Exhibit to Form 10-K for year ended
December 31, 1996, and is incorporated herein by reference)
JJ. Stock Option/Non-Compete Agreement with Stephen G. Morrison dated
October 22, 1996 (filed as an Exhibit to Form 10-K for year ended December 31,
1996, and is incorporated herein by reference)
KK. Stock Option/Non-Compete Form Agreement dated January 8, 1997 for
named executive officers together with schedule identifying particulars for
each executive officer (filed as an Exhibit to Form 10-Q for the quarter ended
March 31, 1997, and is incorporated herein by reference)
LL. Annual Bonus Program for Executive Officers (filed as an Exhibit
to Form 10-Q for the quarter ended March 31. 1997, and is incorporated herein
by reference)
MM. Form of Amendment No. 1 to the Employment Agreements with Messrs.
Butare, Morrison and Williams (filed herewith)
11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
A. Filed herewith
27. FINANCIAL DATA SCHEDULE
A. Filed herewith (EDGAR version only)
ADDENDUM NO. 1
TO
EMPLOYMENT AGREEMENT
This Addendum is effective April ___, 1997, and is hereby made a part of and
incorporated into the Employment Agreement by and between Policy Management
Systems Corporation ("Employer") and, ("Employee") dated November 7, 1996 (the
"Agreement"). In the event that any provision of this Addendum and any
provision of the Agreement is inconsistent or conflicting, the inconsistent or
conflicting provision of this Addendum shall be and constitute an amendment of
the Agreement and shall control, but only to the extent that such provision is
inconsistent or conflicting with the Agreement.
<PAGE>
Employer and Employee hereby agree to amend the above referenced Agreement as
follows:
WHEREAS, Employer and Employee entered the Agreement on November 7, 1996 to
provide Employee, among other benefits, certain benefits in the event of a
change in control of Employer;
WHEREAS, Employer and Employee had prior to November 7, 1996 entered into one
or more agreements relating to stock options which also provided Employee
certain rights in the event of a change in control of Employer; and
WHEREAS, Employer and Employee now seek to clarify that the change in control
provisions in the stock option agreement(s) will continue to control the
rights relating to the stock options granted in the event of a change in
control of Employer.
IT IS THEREFORE AGREED AS FOLLOWS:
1. Section 14 of the Agreement is deleted in its entirety and replaced
with the following Section 14:
14. OPTION AGREEMENT AMENDMENTS.
------------------------------
(i) Notwithstanding the provisions of Section 16 of this Agreement, the
provisions in Section 3C Additional Compensation of any Stock
------------------------
Option/Non-Compete Agreement between the Employer and Employee which pre-date
this Agreement are deleted in their entirety and are superseded in full by
this Agreement.
(ii) Notwithstanding the provisions of Section 16 of this Agreement, the
provisions in any stock option agreement between Employer and Employee shall
continue to govern the rights of Employee with respect to those stock options
in the event of a "change in control" as that term is defined in the relevant
stock option agreement and this Agreement shall have no force or effect with
respect to such stock options.
2. Employer and Employee specifically agree that the parties intend for
the terms and conditions of Section 14 set forth above to be deemed to be in
force as of November 7, 1996, that is, as though the terms and conditions
written above had been in the Agreement on November 7, 1996.
<PAGE>
EMPLOYER EMPLOYEE
POLICY MANAGEMENT SYSTEMS CORPORATION
By: By:
(Authorized Signature) (Authorized Signature)
(in non-black ink, please) (in non-black ink, please)
(Name) (Name)
(Title) (Title)
(Execution Date) (Execution Date)
<PAGE>
Exhibit 11
Statement Regarding Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
- -----------------------------------------------------------------------
(In Thousands, Except Per Share Data)
Primary net income per share
<S> <C> <C> <C> <C>
Net income:
Net income as reported . . . . . $10,694 $15,803 $20,786 $27,431
Weighted average number
of common shares outstanding . 18,187 18,604 18,183 19,034
Common stock equivalents. . . . . 168 339 164 327
------- ------- ------- -------
Primary shares. . . . . . . . . . 18,355 18,943 18,347 19,361
Primary net income per share . . . $ .58 $ .83 $ 1.13 $ 1.42
======= ======= ======= =======
Fully diluted net income per share
Net income as reported $10,694 $15,803 $20,786 $27,431
Weighted average number
of common shares outstanding 18,187 18,604 18,183 19,034
Common stock equivalents 168 339 164 327
------- ------- ------- -------
Fully diluted shares 18,355 18,943 18,347 19,361
Fully diluted net income per share $ .58 $ .83 $ 1.13 $ 1.42
======= ======= ======= =======
</TABLE>
<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 SIX MONTHS ENDED
JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 9626
<SECURITIES> 2496
<RECEIVABLES> 132824
<ALLOWANCES> 764
<INVENTORY> 0
<CURRENT-ASSETS> 178327
<PP&E> 248857
<DEPRECIATION> 132055
<TOTAL-ASSETS> 580037
<CURRENT-LIABILITIES> 98591
<BONDS> 0
0
0
<COMMON> 182
<OTHER-SE> 383691
<TOTAL-LIABILITY-AND-EQUITY> 580037
<SALES> 0
<TOTAL-REVENUES> 320056
<CGS> 0
<TOTAL-COSTS> 233789
<OTHER-EXPENSES> 51868
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2573
<INCOME-PRETAX> 33287
<INCOME-TAX> 12501
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20786
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.13
</TABLE>
