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 quarterly period ended MARCH 31, 1998
Commission file number 1-0557
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 (PO BOX TEN)
BLYTHEWOOD, SC (COLUMBIA, SC) 29016 (29202)
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (803) 333-4000
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.
18,393,268 Common shares, $.01 par value, as of May 8, 1998.
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, 1997.
<PAGE>
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<CAPTION>
POLICY MANAGEMENT SYSTEMS CORPORATION
INDEX
PART I.FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Income for the Three Months Ended March 31, 1998
and 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997 . . . 4
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
Income for the Three Months Ended March 31, 1998 and 1997 . . . . . . . . . 5
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . 21
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
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<TABLE>
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PART I
FINANCIAL INFORMATION
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months
Ended March 31,
1998 1997
(Unaudited)
- ----------------------------------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C>
REVENUES
Licensing . . . . . . . . . . . . . . . . . . . $ 28,737 $ 26,230
Services. . . . . . . . . . . . . . . . . . . . 111,684 88,853
--------- ---------
140,421 115,083
--------- ---------
OPERATING EXPENSES
Cost of revenues
Employee compensation & benefits . . . . . . . 62,964 47,329
Computer and communications expenses . . . . . 8,599 7,834
Depreciation and amortization of
property, equipment and
capitalized software costs. . . . . . . . . . 15,830 13,832
Other costs & expenses . . . . . . . . . . . . 7,032 5,761
Selling, general and administrative
expenses. . . . . . . . . . . . . . . . . . . 22,725 22,112
Amortization of goodwill and
other intangibles . . . . . . . . . . . . . . 2,423 2,472
--------- ---------
119,573 99,340
--------- ---------
OPERATING INCOME . . . . . . . . . . . . . . . . 20,848 15,743
Equity in earnings of
unconsolidated affiliates . . . . . . . . . . 205 370
Other Income and Expenses
Investment income. . . . . . . . . . . . . . . 502 427
Interest expense and other charges . . . . . . (927) (1,217)
--------- ---------
(425) (790)
--------- ---------
Income from continuing operations
before income taxes. . . . . . . . . . . . . . 20,628 15,323
Income taxes . . . . . . . . . . . . . . . . . . 7,761 5,718
--------- ---------
INCOME FROM CONTINUING OPERATIONS. . . . . . . . 12,867 9,605
DISCONTINUED OPERATIONS:
Income from operations of discontinued
operations less applicable income
taxes of $215 and $351, respectively . . . . 322 487
--------- ---------
Net income . . . . . . . . . . . . . . . . . . . $ 13,189 $ 10,092
========= =========
BASIC EARNINGS PER SHARE:
Income from continuing operations. . . . . . . $ 0.70 $ 0.53
Income from discontinued operations. . . . . . 0.02 0.03
--------- ---------
$ 0.72 $ 0.56
========= =========
DILUTED EARNINGS PER SHARE:
Income from continuing operations. . . . . . . $ 0.65 $ 0.52
Income from discontinued operations. . . . . . 0.02 0.03
--------- ---------
$ 0.67 $ 0.55
========= =========
Weighted average common shares . . . . . . . . . 18,344 18,179
Weighted average common shares assuming dilution 19,562 18,400
<FN>
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
March 31, December 31,
1998 1997
-------- --------
(In Thousands, Except Share Data)
Assets
Current assets
<S> <C> <C>
Cash and equivalents $ 19,591 $ 32,179
Marketable securities 20 3,280
Receivables, net of allowance for uncollectible
amounts of $2,441 ($2,628 at 1997) 127,264 128,789
Income tax receivable 1,116 1,098
Deferred income taxes 6,135 3,628
Other 22,249 16,835
--------- ---------
Total current assets 176,375 185,809
Property and equipment, at cost less accumulated
depreciation and amortization of $145,847
($139,522 at 1997) 118,453 116,433
Receivables 2,888 3,271
Income tax receivable 4,041 4,041
Goodwill and other intangibles, net 68,179 69,125
Capitalized software costs, net 210,898 204,118
Deferred income taxes 21,777 21,996
Investments 8,379 11,066
Other 4,718 2,547
--------- ---------
Total assets $615,708 $618,406
========= =========
Liabilities
Current liabilities
Accounts payable and accrued expenses $ 48,534 $ 57,345
Accrued restructuring charges 124 145
Accrued contract termination costs 619 830
Current portion of long-term debt 5,686 1,191
Income taxes payable 8,707 7,499
Unearned revenues 16,525 18,806
Other 396 397
--------- ---------
Total current liabilities 80,591 86,213
Long-term debt 19,443 37,714
Deferred income taxes 86,715 80,496
Accrued restructuring charges 1,413 1,366
Other 3,104 2,121
--------- ---------
Total liabilities 191,266 207,910
--------- ---------
Commitments and contingencies (Note 2)
Stockholders' Equity
Special stock, $.01 par value, 5,000,000 shares
authorized - -
Common stock, $.01 par value, 75,000,000 shares
authorized, 18,398,652 shares issued and
outstanding (18,339,304 at December 31, 1997) 184 183
Additional paid-in capital 113,154 112,090
Retained earnings 319,556 306,367
Accumulated other comprehensive income (8,452) (8,144)
--------- ---------
Total stockholders' equity 424,442 410,496
--------- ---------
Total liabilities and stockholders' equity $615,708 $618,406
========= =========
<FN>
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income Total
- -------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 . . $182 $106,104 $256,110 $ 856 $363,252
Net income . . . . . . . . . . - - 10,092 - 10,092
Other comprehensive income,
net of tax:
Foreign currency
translation adjustment . - - - (2,727) (2,727)
Unrealized gain (loss) on
marketable securities. . - - - 1 1
Stock options exercised
(215 shares) . . . . . . . . - 7 - - 7
----- --------- -------- -------- ---------
BALANCE, MARCH 31, 1997. . . . $182 $106,111 $266,202 $(1,870) $370,625
===== ========= ======== ======== =========
BALANCE, DECEMBER 31, 1997 . . $183 $112,090 $306,367 $(8,144) $410,496
Net income . . . . . . . . . . - - 13,189 - 13,189
Other comprehensive income,
net of tax:
Foreign currency
translation adjustment . - - - (300) (300)
Unrealized gain (loss) on
marketable securities. . - - - (8) (8)
Stock options exercised
(205,748 shares) . . . . . . 2 11,023 - - 11,025
Repurchase of 146,400 shares
of common stock. . . . . . . (1) (9,959) - - (9,960)
----- --------- -------- -------- ---------
BALANCE, MARCH 31, 1998. . . . $184 $113,154 $319,556 $(8,452) $424,442
===== ========= ======== ======== =========
<FN>
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
1998 1997
-------- --------
(In Thousands)
Operating Activities
<S> <C> <C>
Net income $ 13,189 $ 10,092
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 19,718 17,530
Deferred income taxes 3,264 320
Provision for uncollectible accounts - 742
Impairment and restructuring charges - 444
Changes in assets and liabilities:
Accrued restructuring and lease
termination costs 26 (1,170)
Receivables 2,102 (4,133)
Income taxes receivable (18) 27
Accounts payable and accrued expenses (9,155) (10,849)
Income taxes payable 1,208 3,618
Other, net (9,522) 1,009
--------- ---------
Cash provided by operations 20,812 17,630
--------- ---------
Investing Activities
Proceeds from sales/maturities of available-for-
sale securities 3,257 250
Proceeds from sales of held-to-
maturity securities 2,969 -
Acquisition of property and equipment (9,244) (7,717)
Capitalized internal software development
costs (14,880) (14,368)
Business acquisition (2,688) -
Proceeds from disposal of property and
equipment 200 130
--------- ---------
Cash used by investing activities (20,386) (21,705)
--------- ---------
Financing Activities
Payments on long-term debt (18,271) (23,456)
Proceeds from borrowing under credit facility 4,495 15,238
Issuance of common stock under stock
option plans 11,025 7
Repurchase of common stock (9,960) -
--------- ---------
Cash used by financing activities (12,711) (8,211)
--------- ---------
Effect of exchange rate changes on cash (303) 158
Net decrease in cash and equivalents (12,588) (12,128)
Cash and equivalents at beginning of period 32,179 22,121
--------- ---------
Cash and equivalents at end of period $ 19,591 $ 9,993
========= =========
Supplemental Information
Interest paid $ 1,058 $ 1,182
Income taxes paid 1,123 1,305
<FN>
See accompanying notes
</TABLE>
<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of Policy Management Systems
Corporation (the "Company") have been prepared in accordance with the rules
and regulations of the Securities and Exchange Commission (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.
BASIC AND DILUTED EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") are calculated according to
the provisions of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share". For the Company, the numerator is the same for the
calculation of both basic and diluted EPS. The following is a reconciliation
of the denominator used in the EPS calculations (in thousands):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------
1998 1997
------ -------
Weighted Average Shares
- -----------------------
<S> <C> <C>
Basic EPS. . . . . . . . . . . . 18,344 18,179
Effect of common stock options . 1,218 221
------ ------
Diluted EPS. . . . . . . . . . . 19,562 18,400
====== ======
</TABLE>
Options to purchase 17,550 and 375,000 shares of common stock at $78.94
and $81.90 per share, respectively, were outstanding but were not included in
the computation of diluted EPS for 1998 because the options' exercise prices
were greater than the average market price for the Company's common stock for
the period.
<PAGE>
NEW ACCOUNTING STANDARDS
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), was issued. SFAS 130
establishes standards for reporting and display of comprehensive income and
its components, and is effective for fiscal years beginning after December 15,
1997. The Company adopted SFAS 130 at January 1, 1998 and has included the
appropriate disclosures in the Consolidated Statements of Changes in
Stockholders' Equity and Comprehensive Income.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP
97-2"). SOP 97-2 provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions, and is effective
for transactions entered into in fiscal years beginning after December 31,
1997. The Company adopted SOP 97-2 at January 1, 1998. The adoption did not
have a material impact on the Company's financial statements.
In February 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance on accounting for the costs of computer software developed
or obtained for internal use, and is effective for fiscal years beginning
after December 31, 1998, with earlier adoption encouraged. The Company
adopted SOP 98-1 at January 1, 1998. The adoption did not have a material
effect on the Company's financial statements.
OTHER MATTERS
Certain prior year amounts have been reclassified to conform to current
year presentation.
NOTE 2. CONTINGENCIES
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 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. 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 the
Company's estimate of anticipated liability for the costs associated with
these matters.
<PAGE>
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 in excess of $160 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"),
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 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.
<PAGE>
NOTE 3. SEGMENT INFORMATION
The Company's operating segments are the five revenue-producing
components of the Company for which separate financial information is produced
for internal decision making and planning purposes. The segments are as
follows:
1. Property and casualty enterprise software and services (generally referred
to as the "domestic property and casualty business"). This segment provides
software products, product support, professional services and outsourcing
primarily to the US property and casualty insurance market.
2. Life and financial solutions enterprise software and services (generally
referred to as the "domestic life and financial solutions business"). This
segment provides software products, product support, professional services and
outsourcing primarily to the US life insurance and related financial services
markets.
3. International. This segment provides software products, product support,
professional services, outsourcing and information services to the property
and casualty and life insurance markets primarily in Canada, Europe, Asia and
Australia.
4. Property and casualty information services. This segment provided
information services, principally motor vehicle records and claims histories,
to US property and casualty insurers. This segment was sold in August 1997
and is presented as a discontinued operation.
5. Life information services. This segment provides information services,
principally physician reports and medical histories, to US life insurers. This
segment is in the process of being sold and is presented as a discontinued
operation.
<PAGE>
Information about the Company's operations for the three months ended March
31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------
1998 1997
-------- --------
(In thousands)
REVENUES FROM EXTERNAL CUSTOMERS
<S> <C> <C>
Enterprise software and services
Property and casualty . . . . . . . . . . $ 67,951 $ 56,274
Life and financial solutions. . . . . . . 30,425 20,155
--------- ---------
Total US revenues . . . . . . . . . . . 98,376 76,429
International . . . . . . . . . . . . . . 42,045 38,654
--------- ---------
Total revenues from
continuing operations. . . . . . . . $140,421 $115,083
========= =========
Discontinued Operations
Information Services
Property and casualty. . . . . . . . . . $ - $ 24,069
Life . . . . . . . . . . . . . . . . . . 7,125 16,104
INCOME (EXPENSE) FROM CONTINUING OPERATIONS
Enterprise software and services
Property and casualty . . . . . . . . . . $ 17,460 $ 15,517
Life and financial solutions. . . . . . . 6,879 3,918
Corporate and US administrative . . . . . (6,491) (4,730)
--------- ---------
Total US operating income . . . . . . . 17,848 14,705
--------- ---------
International . . . . . . . . . . . . . . 4,962 2,534
International administrative. . . . . . . (1,962) (1,496)
--------- ---------
Total international . . . . . . . . . . 3,000 1,038
--------- ---------
Operating income. . . . . . . . . . . 20,848 15,743
--------- ---------
Equity in earnings of
unconsolidated affiliates . . . . . . . . 205 370
Other income and expenses . . . . . . . . . (425) (790)
Income taxes. . . . . . . . . . . . . . . . 7,761 5,718
--------- ---------
Income from continuing operations . . . . $ 12,867 $ 9,605
========= =========
DISCONTINUED OPERATIONS
Information Services
Property and casualty . . . . . . . . . . $ - $ 274
Life. . . . . . . . . . . . . . . . . . . 560 564
Other income and expenses . . . . . . . . (23) -
Income taxes. . . . . . . . . . . . . . . 215 351
--------- ---------
Discontinued operations, net . . . . . . $ 322 $ 487
========= =========
</TABLE>
<PAGE>
NOTE 4. DISCONTINUED OPERATIONS
The Company has signed a definitive agreement to sell its life
information services business segment. This transaction is expected to be
concluded in the second quarter of 1998 and the Company does not anticipate
any material gain or loss. The operations of this segment are presented as
discontinued operations in the accompanying Consolidated Statement of
Operations. The following is a description of the estimated assets to be
disposed of (in thousands):
<TABLE>
<CAPTION>
March 31,
1998
------
Current assets
<S> <C>
Receivables, net of allowance for uncollectible
amounts of $39. . . . . . . . . . . . . . . . $ 6,908
Other . . . . . . . . . . . . . . . . . . . . . 1,735
-------
8,643
Property and equipment, at cost less accumulated
depreciation and amortization of $7,987 . . . 5,000
Goodwill and other intangibles, net. . . . . . . 5,166
Capitalized software costs, net. . . . . . . . . 1,272
Other. . . . . . . . . . . . . . . . . . . . . . 58
-------
Total assets . . . . . . . . . . . . . . . . . $20,139
=======
</TABLE>
<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, 1997.
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>
1998 vs. 1997
Percent
Percentage of Revenues Increase (Decrease)
---------------------- ------------------
Three Three
Months Ended Months
March 31, Ended
-------------
1998 1997 March 31
----- ----- ----------
<S> <C> <C> <C>
Revenues
Licensing . . . . . . . . . . . . . 20.5% 22.8% 9.6%
Services. . . . . . . . . . . . . . 79.5 77.2 25.7
------ ------
100.0 100.0 22.0
Operating expenses
Cost of revenues
Employee compensation and benefits 44.9 41.1 33.0
Computer & communication expenses. 6.1 6.8 9.8
Depreciation & amortization
of property, equipment &
capitalized software costs. . . . 11.3 12.0 14.4
Other costs & expenses . . . . . . 5.0 5.0 22.1
Selling, general &
administrative expenses . . . . . 16.2 19.2 2.8
Amortization of goodwill and
other intangibles . . . . . . . . 1.7 2.2 (2.0)
------ ------
85.2 86.3 20.4
Operating income . . . . . . . . . . 14.8 13.7 32.4
Equity in earnings of unconsolidated
affiliates. . . . . . . . . . . . 0.2 0.4 (44.6)
Other income and expenses. . . . . . (0.3) (0.7) (46.2)
------ ------
Income from continuing operations
before income taxes. . . . . . . . 14.7 13.4 34.6
Income taxes . . . . . . . . . . . . 5.5 5.0 35.7
------ ------
Income from continuing operations. . 9.2 8.4 34.0
Discontinued operations, net . . . . 0.2 0.4 (33.9)
------ ------
Net income . . . . . . . . . . . . . 9.4% 8.8% 30.7%
====== ======
</TABLE>
<PAGE>
REVENUES
Three Months
Ended March 31,
------------------
Licensing 1998 1997 Change
------- ------- ------
(Dollars in Millions)
Initial charges . . . . . . . . $ 12.6 $ 11.3 11.6%
Monthly charges . . . . . . . . 16.1 14.9 8.0
-------- -------- ------
$ 28.7 $ 26.2 9.6%
======= ======= ======
Percentage of total revenues . . 20.5% 22.8%
------- -------
Initial license revenues increased $1.3 million from the first quarter of
1997 to the first quarter of 1998, with the following increases or decreases
by business segment: domestic property and casualty up 77.5% ($2.3 million);
life insurance and financial solutions down 21.7% ($0.9 million); and
international down 2.2% ($0.1 million).
Initial license charges for the first quarter of 1998 include
right-to-use licenses of $4.9 million. The right-to-use licenses represent
acquisitions by certain customers of perpetual rights. This compares to $1.0
million in right-to-use licenses for the same period of 1997.
Monthly license charges increased $1.2 million from the first quarter of
1997 to the first quarter of 1998 with the following increases by business
segment: domestic property and casualty up 2.1% ($0.2 million); life
insurance and financial solutions up 23.7% ($0.6 million); and international
up 11.1% ($0.4 million). These increases are related to the increase in
licensing activity over the last several quarters.
Because a significant portion of initial licensing revenues are recorded
at the time new systems are licensed and such licensing activity can vary
dramatically from quarter to quarter, 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:
1998 1997 1996
----- --------------------------- -------------------
1st 4th 3rd 2nd 1st 4th 3rd 2nd
----- --------------------------- -------------------
(Dollars in Millions)
Initial license revenues $12.6 $25.1 $16.9 $16.6 $11.3 $19.4 $10.0 $12.0
% of total revenues 9.0% 17.0% 12.8% 13.4% 9.8% 15.5% 9.3% 12.4%
<PAGE>
Three Months
Ended March 31,
-----------------
Services 1998 1997 Change
------ ------- ------
(Dollars In Millions)
Professional and outsourcing . . $110.8 $ 87.2 27.1%
Information. . . . . . . . . . . 0.1 0.2 (29.4)
Other. . . . . . . . . . . . . . 0.8 1.5 (49.2)
------ ------ ------
$111.7 $ 88.9 25.7%
====== ====== =======
Percentage of total revenues . . 79.5% 77.2%
------ ------
Professional and outsourcing services revenues increased $23.6 million
from the first quarter of 1997 to the first quarter of 1998, with the
following increases by business segment: domestic property and casualty up
22.7% ($9.8 million); life insurance and financial solutions up 78.0% ($10.5
million); and international up 10.9% ($3.3 million). The increases are
principally due to increases in implementation services and in the processing
volumes of services provided to new and existing customers.
OPERATING EXPENSES
COST OF REVENUES
Employee compensation and benefits increased 33.0% for the first quarter
1998 compared with the first quarter of 1997, principally the result of
increased salaries and related costs associated with the growth in staffing in
professional services business units. Compensation and benefits increased
24.8% ($3.7 million) internationally, while domestic increased 36.9% ($11.9
million).
Computer and communications expenses increased 9.8% for the first quarter
1998 compared with the first quarter of 1997, principally as a result of
increased communications, data circuit and maintenance costs associated with
the growth of the Company's domestic and international professional services
operations.
Depreciation and amortization of property, equipment and capitalized
software costs increased 14.4% for the first quarter 1998 compared with the
first quarter of 1997, principally due to higher amortization expense
resulting from the recent release of the Company's S3+ property and casualty
insurance 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 22.1% for the first quarter
1998 compared with the first quarter of 1997 principally due to increased
facility and travel costs.
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses remained relatively
unchanged.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles remained relatively
unchanged.
STRATEGIC ALLIANCES
Microsoft. In April 1998, the Company announced a new strategic
business alliance with Microsoft Corporation. Under this strategic alliance,
the Company and Microsoft will engage in joint development, sales and
marketing activities geared toward the insurance and related financial
services industries. This alliance is not exclusive.
Lockheed Martin. In March 1998, the Company announced an agreement in
principle to form a strategic alliance with Integrated Business Solutions, a
unit of Lockheed Martin Corporation ("Lockheed"). Under the terms of this
agreement the Company will turn over operation of its Blythewood, South
Carolina, data center to Lockheed in the third quarter of 1998. The exact
terms and conditions of the agreement continue to be negotiated. The
consolidated financial statements contained herein do not include any effect
of this agreement.
OPERATING INCOME
First quarter 1998 operating income increased 32.4% compared with the
1997 first quarter. Property and casualty insurance operating income
increased 12.5%, domestic life insurance operating income increased 75.6% and
international operating income increased 95.7%. The increase in operating
income is primarily related to increases in professional services and
outsourcing revenues.
OTHER INCOME AND EXPENSE
Interest expense decreased 23.8% for the first quarter 1998 compared with
the first quarter of 1997, principally due to lower levels of borrowed funds
under the Company's credit facility. The average nominal interest rate
applicable to borrowings under the Company's credit facility during the first
quarter of 1998 was 5.9%.
INCOME TAXES
The effective income tax rate (income taxes expressed as a percentage of
pre-tax income) was 37.7% and 37.6% for the three months ended March 31, 1998
and 1997, respectively. The effective rate for the first quarter of 1998 is
<PAGE>
higher than the federal statutory rate principally due to the effect of state
and local income taxes.
DISCONTINUED OPERATIONS
Income from operations of the discontinued operations decreased 33.9% for
the first quarter 1998 compared with the first quarter of 1997, principally
due to 1997 results including the discontinued property and casualty
information services segment, which was sold in August 1997, as well as the
discontinued life information services business. 1998 results include the
discontinued life information services segment only.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
- --------------------------------------------------
(Dollars in Millions)
<S> <C> <C>
Cash and equivalents, marketable
securities, and investments. . $ 28.0 $ 46.5
Current assets . . . . . . . . . 176.4 185.8
Current liabilities. . . . . . . 80.6 86.2
Working capital. . . . . . . . . 95.8 99.6
Long-term debt . . . . . . . . . 19.4 37.7
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
- ---------------------------------------------------------
(Dollars in Millions)
<S> <C> <C>
Cash provided by operations . . . . . . $ 20.8 $ 17.6
Cash used for investing activities. . . (20.4) (21.7)
Cash used for financing activities. . . (12.7) (8.2)
</TABLE>
The Company's current ratio (current assets divided by current
liabilities) stood at 2.2 at March 31, 1998, which management believes is
sufficient when combined with the available credit facility to provide for
day-to-day operating needs and the flexibility to take advantage of investment
opportunities. The Company has available (net of amounts outstanding at March
31, 1998) $181 million under its $200 million credit facility. Also, the
Company has available (net of amounts outstanding at March 31, 1998) $10.5
million under its $15 million uncommitted operating line of credit with which
it may choose to fund temporary operating cash needs.
During the three months ended March 31, 1998 the Company capitalized
software development costs of $14.9 million, principally related to the
development of its S3+ client/server property and casualty software, CyberLife
object-oriented client/server life insurance software, and
<PAGE>
INSURE/90 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 1998, excluding
any possible business acquisitions or common stock repurchases, are as
follows: acquisition of data processing and communications equipment, support
software, buildings, building improvements and office furniture, fixtures and
equipment and costs relating to the internal development of software systems.
The Company has historically used the cash generated from operations for
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, 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 and related financial services
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;
<PAGE>
- - 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.
YEAR 2000 READINESS
Many existing computer programs were designed to use only two digits to
identify a year in date fields. If not corrected, these applications could
fail or produce erroneous results when working with dates in the Year 2000 and
beyond. This Year 2000 issue may potentially affect the Company in four areas:
its product offerings, its services offerings, third-party products used
internally, and its suppliers. The Company's various business units have been
responsible for the assessment, remediation, validation and implementation
of Year 2000 corrective actions.
The application code of the Company's primary product offerings, S3+,
Series II, INSURE/90, POINT , CyberLife and CYBERTEK CK/4 products, were
either initially designed or have been updated in their currently available
releases to be capable of processing and storing date data with dates in both
the twentieth (1900's) and twenty-first (2000's) centuries. The Company is
currently conducting an inventory and verifying the Year 2000 readiness of the
third-party products with which these Company applications are designed to
operate in order to validate that no unanticipated Year 2000 issues exist. In
addition, the Company also is in the process of conducting an inventory and
assessing other Company and third-party products previously licensed by the
Company to customers to determine if any renovation efforts may be required in
relation to these products.
<PAGE>
In its services offerings, the Company has assessed and commenced Year 2000
remediation of the applications used in processing the data of its Information
Technology Outsourcing and Business Process Outsourcing services customers.
Some of these remediation efforts are complete and some are still in various
stages of coding, testing or implementation. The Company intends to complete
these Year 2000 remediation efforts and required testing, in a Year 2000 test
environment, prior to the need for these services to process data involving
dates in the twenty-first century.
The primary third-party products used by the Company for its internal
operation include its data center hardware and software, internal financial
systems, and network and PC hardware and software. The Company's Blythewood
data center has completed its hardware and operating software inventory
assessments and has substantially completed the remediation efforts of
updating these hardware and software assets for the Year 2000 requirements.
The Company's Australian and European data centers also have completed their
inventory assessment and are implementing the hardware and operating software
enhancements required for Year 2000 remediation.
In 1996, the Company commenced the process of identifying, selecting and
implementing an enterprise wide financial and human resources system to
replace its existing systems. The selected solution is currently being
implemented, is designed to meet Year 2000 requirements, and is scheduled to
be operational at the end of 1998. In addition, the Company is commencing an
inventory and assessing all of its network and PC hardware and software to
determine if any Year 2000 remediation upgrades will be required.
Finally, the primary suppliers upon whom the Company's services are
dependent are electric utility and telephone companies who provide services to
the Company's various offices and data centers. If these services are
interrupted for a prolonged period due to the suppliers' Year 2000 problems,
it will disrupt the Company's ability to provide its services to customers,
notwithstanding the backup battery and diesel power supplies available for the
data center locations.
As discussed above, the Company has not yet fully completed its Year 2000
evaluations or its remediation efforts. If such remediation efforts are not
completed on a timely basis, Year 2000 issues could have a material impact on
the Company's operations and financial results. However, based upon the
Company's experience to date, at this time, it is not anticipated that the
completion of remaining Year 2000 remediation efforts will have an adverse
material effect upon the Company's financial position or results of
operations.
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 3, Contingencies, of Notes to Consolidated Financial Statements,
which is incorporated by reference in this Item.
ITEMS 2, 3, 4 AND 5 are not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits
Exhibits required to be filed with this Quarterly Report on Form 10-Q are
listed in the following Exhibit Index.
Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
March 31, 1998.
<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: May 12, 1998 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. 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)
<PAGE>
F. 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)
G. 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)
H. 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)
I. 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)
J. Stock Option/Non-Compete Form Agreement for named executive officers
together with a 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)
K. Stock Option/Non-Compete Form Agreement for named executive officers
together with a 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)
L. Stock Option Non-Compete Form Agreement for named executive officers
together with a 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)
M. 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)
N. 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)
O. 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)
P. 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)
<PAGE>
Q. Stock Option/Non-Compete Form Agreement for named executive officers
together with a 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)
R. Stock Option/Non-Compete Form Agreement for named executive officers
together with a 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)
S. Stock Option/Non-Compete Form Agreement for named executive officers
together with a 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 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)
U. 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)
V. 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)
W. 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)
X. 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)
Y. Stock Option/Non-Compete Form Agreement for named executive officers
together with a 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)
Z. 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)
<PAGE>
AA. 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)
BB. Stock Option/Non-Compete Form Agreement dated January 8, 1997 for
named executive officers together with a 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)
CC. 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)
DD. Form of Amendment No. 1 to the Employment Agreements with Messrs.
Butare, Morrison and Williams, together with a schedule identifying
particulars for each executive officer (filed as an Exhibit to Form 10-Q for
the quarter ended June 30, 1997, and is incorporated herein by reference)
EE. Form of Employment Agreements with Messrs. Wilson, Bailey and Coggiola
together with schedule identifying particulars for each executive officer
(filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1997,
and is incorporated herein by reference)
FF. Credit Agreement dated as of August 8, 1997, among Policy Management
Systems Corporation, the Guarantors Party hereto, Bank of America National
Trust and Savings Association and the Other Financial Institution Party Hereto
(filed as an exhibit to Form 10-Q for the quarter ended September 30, 1997,
and is incorporated herein by reference)
GG. Employment Agreement dated January 1, 1998, and Addendum No. 1 thereto
dated January 26, 1998, with Donald A. Coggiola (filed as an exhibit to Form
10-K for the year ended December 31, 1997 and is incorporated herein by
reference)
HH. Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed herewith)
27. FINANCIAL DATA SCHEDULES
A. Three Months Ended March 31, 1998 filed herewith (EDGAR version only)
B. Three Months Ended March 31, 1997, as restated, filed herewith (EDGAR
version only)
EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT
THIS EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT ("the Agreement") is made
effective as of January 2, 1998, by and between [NAME] ("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 January 2, 1998, PMSC grants EMPLOYEE
-----
"non-qualified" Options to purchase up to [SHARES] 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.
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., January 2, 1998. These Options must be exercised
within ten (10) years of the effective date of this Agreement or they expire.
<PAGE>
3. Availability for Exercise. 25% of the shares subject to the Options
-------------------------
granted will become available for exercise at the end of each of the four (4)
years following the effective date of this Agreement. For example 25% of the
total number of Options granted will be available for exercise beginning
January 2, 1999; 50% will be available for exercise beginning January 2, 2000;
75% will be available for exercise beginning January 2, 2001; and 100% will be
available for exercise beginning January 2, 2002. Once Options become
available for exercise, they will remain available for exercise for so long as
EMPLOYEE is employed by PMSC 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: (i) 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; (ii) EMPLOYEE shall have a period of ninety (90) days after
termination of employment to exercise the Options granted hereby; and (iii)
and in the event of the death of EMPLOYEE during the aforementioned ninety
(90) day period, said Options may be exercised during a period of one (1) year
from the date of death, as described in Section 10 of the Plan, but in no
event shall these Options be exercised after the tenth anniversary date these
Options were granted.
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.
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.
<PAGE>
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
exampleif 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 purchasedplus the combined (federal, FICA
and state) tax liability EMPLOYEE incurs. Such taxes paid to PMSC will be
forwarded to the Internal Revenue Service and appropriate state tax commission
and credited to EMPLOYEE in the same manner as the withholding tax on
EMPLOYEE's salary. EMPLOYEE's actual tax will depend upon the overall tax
rate calculated when EMPLOYEE prepares his or her tax returns. EMPLOYEE
should consult a tax professional regarding questions about EMPLOYEE's actual
tax liability.
<PAGE>
7. Noncompetition. In consideration of the Options hereby granted,
--------------
EMPLOYEE covenants and agrees that EMPLOYEE shall devote his or her best
efforts to furthering the best interests of PMSC and that for the one (1) year
period from the effective date hereof, and if EMPLOYEE separates from
employment with PMSC for any reason within said one (1) year period, then for
a one (1) year period from the date of such separation from employment,
EMPLOYEE shall not "Compete" with PMSC. The region within which EMPLOYEE
agrees not to
<PAGE>
Compete with PMSC is the United States, Canada and those countries in which
PMSC has customers or clients as of the date of EMPLOYEE's separation from
employment. For the purpose of this Agreement, the term "Compete" shall have
its commonly understood meaning which shall include, but not be limited by,
the following items with respect to PMSC's insurance application software
licensing, data processing, consulting and information services businesses and
any other businesses carried on by PMSC at the time of EMPLOYEE's separation
from employment:
(i) soliciting or accepting as a client or customer any individual,
partnership, corporation, trust or association that was a client, customer or
actively sought after prospective client or customer of PMSC during the twelve
(12) calendar month period immediately preceding the date of EMPLOYEE's
separation from employment;
(ii) acting as an employee, independent contractor, agent,
representative, consultant, officer, director, or otherwise affiliated party
of any entity or enterprise which is competing with PMSC in offering similar
application software or services to parties described in (i) above; or
(iii) participating in any such competing entity or enterprise as an
owner, partner, limited partner, joint venturer, creditor or stockholder
(except as an equity holder holding less than a one percent (1%) interest).
8. Non-Hiring. During EMPLOYEE'S employment with PMSC and for a period of
----------
three (3) years after separation from such employment, EMPLOYEE agrees that
EMPLOYEE shall under no circumstances hire, attempt to hire or assist or be
involved in the hiring of any employee of PMSC either on EMPLOYEE'S behalf or
on behalf of any other person, entity or enterprise. Also, for a similar
period of time, EMPLOYEE agrees to not communicate to any such person, entity
or enterprise the names, addresses or any other information concerning any
employee of PMSC or any past, present or prospective client or customer of
PMSC.
<PAGE>
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.
<PAGE>
10. Breach of Agreement. EMPLOYEE agrees that in the event EMPLOYEE
--------------------
breaches any provision of this Agreement, PMSC shall be entitled, in addition
to any other remedies it may have under this Agreement, to offset, to the
extent of any liability, loss, damage or injury from such breach, any payments
due to EMPLOYEE pursuant to his or her employment with PMSC.
11. Employment Understanding. This Agreement constitutes the entire
-------------------------
agreement between the parties with regard to the subject matter hereof, and
there are no agreements, understandings, restrictions, warranties or
representations between the parties relating to said subject matter other
than those set forth or provided for herein or in any Agreement Not To Divulge
or employment agreement between PMSC and EMPLOYEE. It is understood that
PMSC's and EMPLOYEE's relationship is one of "at will" employment unless
EMPLOYEE and PMSC have entered into a written employment agreement which
provides otherwise. This Agreement shall not affect, or be affected by, any
employment agreement, if any, between PMSC and EMPLOYEE.
12. General. In the event that any provision of this Agreement or any
-------
word, phrase, clause, sentence or other portion thereof (including, without
limitation, the geographical and temporal restrictions contained herein)
should be held to be unenforceable or invalid for any reason, such provision
or portion thereof shall be modified or deleted in such a manner so as to make
this Agreement enforceable to the fullest extent permitted under applicable
laws. All references to PMSC shall include its subsidiaries as applicable.
This Agreement shall inure to the benefit of and be enforceable by PMSC and
its successors and assigns. No provision of this Agreement may be changed,
modified, waived or terminated, except by an instrument in writing signed by
the party against whom the enforcement of such is sought. No waiver of any
provision or provisions of this Agreement shall be deemed or shall constitute
a waiver of any other provision, whether or not similar, nor shall any waiver
constitute a continuing waiver. Headings in this Agreement are inserted
solely as a matter of convenience and reference and are not a part of this
Agreement in any substantive sense. This Agreement may be executed in two
counterparts, each of which will take effect as an original and shall evidence
one and the same Agreement.
<PAGE>
13. Plan Controls. In the event of any discrepancy between this Agreement
-------------
and the Plan as to the terms and conditions of the Options, the Plan shall
control.
14. Governing Law. The terms of this Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of South Carolina.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective
as of the date first above written.
POLICY MANAGEMENT SYSTEMS CORPORATION
"PMSC"
BY: _________________________________
Stephen G. Morrison
TITLE: Executive Vice President
--------------------------
EMPLOYEE
_____________________________________
(Signature)
_____________________________________
(Type or Print Name)
_____________________________________
(Date Signed by Employee)
<PAGE>
INSTRUCTIONS FOR EXERCISE OF PMSC STOCK OPTIONS
Contact Person: Lynn W. Dillard, Ext. 4303
2L3
Post Office Box Ten
Columbia, SC 29202
An exercise form must be obtained and properly filled out. The form and
employee's check for the appropriate exercise price and withholding taxes
(federal and state income taxes and FICA) must be delivered to the Contact
Person. The Company does not deal with third parties concerning employee's
exercise of his or her stock options. If an employee deals with a brokerage
firm, a bank or any other third party, the employee shall be responsible to
keep such party from impacting on the two-party transaction between the
Company and the employee. This transaction solely consists of employee
bringing Company the exercise form and his or her own check and after several
days the Company giving employee a certificate for his or her shares of stock.
The Company's stock transfer agent is located in New York. If desired, an
employee may request and pay the charges for the certificate to be sent to the
Company via Federal Express. The certificate will only be issued in the
employee's name. Employees may only exercise a whole number of options as
PMSC shall not direct the transfer agent to issue fractional shares.
As an optionholder, an employee is entitled to request copies of the Company's
Annual and Quarterly Reports. An employee will not receive such reports
automatically as an optionholder. Additionally, reports are available upon
request showing a complete list of employee's options outstanding, options
available for exercise, cost per share, total costs, and expiration dates of
options. An employee may wish to request these materials or information
before exercising options by calling or writing the Contact Person.
THESE INSTRUCTIONS ARE SUBJECT TO CHANGE WITHOUT NOTICE.
<PAGE>
SCHEDULE OF PARTICULARS
FOR NAMED EXECUTIVE OFFICERS
RE: EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT
NAMED EXECUTIVE NUMBER
OFFICER GRANTED
G. Larry Wilson 75,000
David T. Bailey 35,000
Paul R. Butare 35,000
Stephen G. Morrison 35,000
Timothy V. Williams 35,000
<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 QUARTER ENDED
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 19591
<SECURITIES> 20
<RECEIVABLES> 129705
<ALLOWANCES> 2441
<INVENTORY> 0
<CURRENT-ASSETS> 176375
<PP&E> 264300
<DEPRECIATION> 145847
<TOTAL-ASSETS> 615708
<CURRENT-LIABILITIES> 80591
<BONDS> 0
0
0
<COMMON> 184
<OTHER-SE> 424258
<TOTAL-LIABILITY-AND-EQUITY> 615708
<SALES> 0
<TOTAL-REVENUES> 140421
<CGS> 0
<TOTAL-COSTS> 119573
<OTHER-EXPENSES> 2423
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 927
<INCOME-PRETAX> 20628
<INCOME-TAX> 7761
<INCOME-CONTINUING> 12867
<DISCONTINUED> 322
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13189
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.67
</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 QUARTER ENDED
MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 9993
<SECURITIES> 2492
<RECEIVABLES> 121398
<ALLOWANCES> 1402
<INVENTORY> 0
<CURRENT-ASSETS> 167709
<PP&E> 244067
<DEPRECIATION> 127879
<TOTAL-ASSETS> 567300
<CURRENT-LIABILITIES> 106458
<BONDS> 0
0
0
<COMMON> 182
<OTHER-SE> 370443
<TOTAL-LIABILITY-AND-EQUITY> 567300
<SALES> 0
<TOTAL-REVENUES> 115083
<CGS> 0
<TOTAL-COSTS> 99340
<OTHER-EXPENSES> 2472
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1217
<INCOME-PRETAX> 15323
<INCOME-TAX> 5718
<INCOME-CONTINUING> 9605
<DISCONTINUED> 487
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10092
<EPS-PRIMARY> .56
<EPS-DILUTED> .55
</TABLE>
