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 SEPTEMBER 30, 1998
Commission file number 1-10557
POLICY MANAGEMENT SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0723125
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
ONE PMSC CENTER (PO BOX TEN)
BLYTHEWOOD, SC (COLUMBIA, SC) 29016 (29202)
(Address of principal executive offices) (Zip Code)
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.
36,070,812 Common shares, $.01 par value, as of November 6, 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>
<TABLE>
<CAPTION>
POLICY MANAGEMENT SYSTEMS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
<S> <C>
Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 1998 and 1997 3
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997. . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income for the Nine
Months Ended September 30, 1998. . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 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. . . . . . . . . . . . . . . . 27
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 27
Signatures . . . . . . . . . . . . . . . . . . . . . . . 28
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I
FINANCIAL INFORMATION
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(Unaudited)
------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES
Licensing . . . . . . . . . . . . . . . . . . . $ 31,454 $ 33,316 $ 89,694 $ 91,868
Services. . . . . . . . . . . . . . . . . . . . 119,849 98,639 346,919 278,998
--------- --------- --------- ---------
151,303 131,955 436,613 370,866
--------- --------- --------- ---------
OPERATING EXPENSES
Cost of revenues
Employee compensation and benefits. . . . . . 65,068 55,982 193,157 154,442
Computer and communications expenses. . . . . 9,727 8,140 25,472 24,214
Depreciation and amortization of property,
equipment and capitalized software costs . . 15,642 14,736 47,195 42,961
Other costs and expenses. . . . . . . . . . . 4,717 5,373 17,526 20,368
Selling, general and administrative expenses. . 27,315 24,535 76,294 68,366
Amortization of goodwill and other intangibles. 2,673 2,451 7,585 7,360
Acquisition related charges:
Purchased research and development . . . . . . 2,000 - 2,000 -
Purchased and internally developed software. . 1,732 - 1,732 -
--------- --------- --------- ---------
128,874 111,217 370,961 317,711
--------- --------- --------- ---------
OPERATING INCOME . . . . . . . . . . . . . . . . 22,429 20,738 65,652 53,155
Equity in earnings of unconsolidated affiliates. 129 274 567 964
Minority interest. . . . . . . . . . . . . . . . (44) - (74) -
Other Income and Expenses
Investment income. . . . . . . . . . . . . . . 390 371 1,076 1,142
Interest expense and other charges . . . . . . (993) (1,378) (2,474) (3,951)
--------- --------- --------- ---------
(603) (1,007) (1,398) (2,809)
--------- --------- --------- ---------
Income from continuing operations
before income taxes. . . . . . . . . . . . . . 21,911 20,005 64,747 51,310
Income taxes . . . . . . . . . . . . . . . . . . 8,740 7,454 24,727 19,135
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS. . . . . . . . 13,171 12,551 40,020 32,175
DISCONTINUED OPERATIONS:
Income from operations of discontinued
operations less applicable income taxes
of $344, $252 and $1,164, respectively . . . - 450 389 1,612
Loss on disposal of discontinued operations
less applicable income taxes (benefit) of
$(38), $2,439, and $(38), respectively . . . - (64) (453) (64)
--------- --------- --------- ---------
- 386 (64) 1,548
--------- --------- --------- ---------
NET INCOME . . . . . . . . . . . . . . . . . . . $ 13,171 $ 12,937 $ 39,956 $ 33,723
========= ========= ========= =========
BASIC EARNINGS PER SHARE:
Income from continuing operations. . . . . . . $ 0.36 $ 0.34 $ 1.09 $ 0.89
Income (loss) from discontinued operations . . - 0.01 - 0.04
--------- --------- --------- ---------
$ 0.36 $ 0.35 $ 1.09 $ 0.93
========= ========= ========= =========
DILUTED EARNINGS PER SHARE:
Income from continuing operations. . . . . . . $ 0.33 $ 0.33 $ 1.01 $ 0.86
Income (loss) from discontinued operations . . - 0.01 - 0.04
--------- --------- --------- ---------
$ 0.33 $ 0.34 $ 1.01 $ 0.90
========= ========= ========= =========
Weighted average common shares . . . . . . . . . 36,458 36,460 36,635 36,398
Weighted average common shares assuming dilution 39,549 38,022 39,471 37,297
<FN>
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
September 30, December 31,
1998 1997
-------- --------
(In thousands, except share data)
<S> <C> <C>
Assets
Current assets
Cash and equivalents. . . . . . . . . . . . . . . . . . . . $ 15,896 $ 32,179
Marketable securities . . . . . . . . . . . . . . . . . . . - 3,280
Receivables, net of allowance for uncollectible
amounts of $2,095 ($2,628 at 1997) . . . . . . . . . . . . 130,622 128,789
Income tax receivable . . . . . . . . . . . . . . . . . . . 1,014 1,098
Deferred income taxes . . . . . . . . . . . . . . . . . . . 9,569 3,628
Other receivable. . . . . . . . . . . . . . . . . . . . . . 11,284 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,710 16,835
--------- ---------
Total current assets. . . . . . . . . . . . . . . . . . . 192,095 185,809
Property and equipment, at cost less accumulated
depreciation and amortization of $121,939
($139,522 at 1997). . . . . . . . . . . . . . . . . . . . . 122,102 116,433
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . 2,188 3,271
Income tax receivable. . . . . . . . . . . . . . . . . . . . 4,041 4,041
Goodwill and other intangibles, net. . . . . . . . . . . . . 81,452 69,125
Capitalized software costs, net. . . . . . . . . . . . . . . 220,476 204,118
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 22,754 21,996
Investments. . . . . . . . . . . . . . . . . . . . . . . . . 9,063 11,066
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,107 2,547
--------- ---------
Total assets. . . . . . . . . . . . . . . . . . . . . . $662,278 $618,406
========= =========
Liabilities
Current liabilities
Accounts payable and accrued expenses . . . . . . . . . . . $ 46,542 $ 57,345
Accrued restructuring charges . . . . . . . . . . . . . . . 187 145
Accrued contract termination costs. . . . . . . . . . . . . 418 830
Current portion of long-term debt . . . . . . . . . . . . . 1,086 1,191
Income taxes payable. . . . . . . . . . . . . . . . . . . . 16,674 7,499
Unearned revenues . . . . . . . . . . . . . . . . . . . . . 12,207 18,806
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 315 397
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . 77,429 86,213
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . 77,000 37,714
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 92,612 80,496
Accrued restructuring charges. . . . . . . . . . . . . . . . 1,409 1,366
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,992 2,121
--------- ---------
Total liabilities. . . . . . . . . . . . . . . . . . . . 252,442 207,910
--------- ---------
Minority interest. . . . . . . . . . . . . . . . . . . . . . 472 -
Commitments and contingencies (Note 3)
Stockholders' Equity
Special stock, $.01 par value, 5,000,000 shares authorized . - -
Common stock, $.01 par value, 75,000,000 shares authorized,
36,125,693 shares issued and outstanding
(18,339,304 at December 31, 1997) . . . . . . . . . . . . . 361 183
Additional paid-in capital . . . . . . . . . . . . . . . . . 71,237 112,090
Retained earnings. . . . . . . . . . . . . . . . . . . . . . 346,139 306,367
Accumulated other comprehensive income . . . . . . . . . . . (8,373) (8,144)
--------- ---------
Total stockholders' equity . . . . . . . . . . . . . . . 409,364 410,496
--------- ---------
Total liabilities and stockholders' equity. . . . . . . $662,278 $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(1) Total
----- ------- -------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997. . . $183 $112,090 $306,367 $(8,144) $410,496
Comprehensive income
Net income . . . . . . . . . . - - 39,956 - 39,956
Other comprehensive income,
net of tax:
Foreign currency
translation adjustments . . - - - (221) (221)
Unrealized loss on
marketable securities . . . - - - (8) (8)
---------
Total comprehensive income 39,727
---------
Stock dividend. . . . . . . . . 184 - (184) - -
Stock options exercised
(709,298 shares). . . . . . . 8 28,793 - - 28,801
Repurchase of 1,349,600 shares
of common stock . . . . . . . (14) (69,646) - - (69,660)
----- --------- --------- -------- ---------
BALANCE, SEPTEMBER 30, 1998 . . $361 $ 71,237 $346,139 $(8,373) $409,364
===== ========= ========= ======== =========
<FN>
See accompanying notes
(1) Comprehensive income for the three months ended September 30, 1998 and 1997
was $14,743 and $11,843, respectively.
Comprehensive income for the nine months ended September 30, 1997 was
$27,935.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
1998 1997
------ ------
(In thousands)
Operating Activities
<S> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . $ 39,956 $ 33,723
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . 58,993 53,694
Deferred income taxes . . . . . . . . . . . . . . 1,517 7,059
Provision for uncollectible accounts. . . . . . . 85 1,763
Minority interest . . . . . . . . . . . . . . . . 74 -
Gain on disposal of discontinued operations . . . (1,986) -
Acquisition related charges . . . . . . . . . . . 3,732 -
Impairment charges. . . . . . . . . . . . . . . . - 444
Changes in assets and liabilities:
Accrued restructuring and lease termination costs 85 (2,355)
Receivables . . . . . . . . . . . . . . . . . . . (5,013) (23,380)
Income taxes receivable . . . . . . . . . . . . . 84 (56)
Accounts payable and accrued expenses . . . . . . (14,127) (12,077)
Income taxes payable. . . . . . . . . . . . . . . 9,036 5,854
Other, net. . . . . . . . . . . . . . . . . . . . . (23,630) (943)
--------- ----------
Cash provided by operations. . . . . . . . . . 68,806 63,726
--------- ----------
Investing Activities
Proceeds from sales/maturities of available-for-
sale securities. . . . . . . . . . . . . . . . . . 3,257 250
Proceeds from sales of held-to-
maturity securities. . . . . . . . . . . . . . . . 2,969 -
Proceeds from sale of business segment. . . . . . . 23,826 2,900
Acquisition of property and equipment . . . . . . . (42,204) (22,430)
Capitalized internal software development costs . . (43,599) (46,809)
Business acquisition. . . . . . . . . . . . . . . . (27,143) -
Investment by minority interest . . . . . . . . . . 425 -
Investment in unconsolidated affiliate. . . . . . . (300) -
Proceeds from disposal of property and equipment. . 1,034 1,183
--------- ----------
Cash used by investing activities. . . . . . . (81,735) (64,906)
--------- ----------
Financing Activities
Payments on long-term debt. . . . . . . . . . . . . (42,319) (120,597)
Proceeds from borrowing under credit facility . . . 81,500 113,033
Issuance of common stock under stock
option plans . . . . . . . . . . . . . . . . . . . 28,801 3,933
Repurchase of common stock. . . . . . . . . . . . . (69,660) -
--------- ----------
Cash used by financing activities. . . . . . . (1,678) (3,631)
--------- ----------
Effect of exchange rate changes on cash. . . . . . . (1,676) 1,329
Net decrease in cash and equivalents . . . . . . . . (16,283) (3,482)
Cash and equivalents at beginning of period. . . . . 32,179 22,121
--------- ----------
Cash and equivalents at end of period. . . . . . . . $ 15,896 $ 18,639
========= ==========
Supplemental Information
Interest paid . . . . . . . . . . . . . . . . . . . $ 2,489 $ 3,636
Income taxes paid . . . . . . . . . . . . . . . . . 9,806 5,471
<FN>
Non-cash investing activities:
The Company transferred $11.2 million of property, plant and equipment at
net book value to Lockheed Martin in exchange for an other receivable to be
paid in January 1999.
See accompanying notes
</TABLE>
<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
----- ----- ----- -----
Weighted Average Shares
- -----------------------
<S> <C> <C> <C> <C>
Basic EPS. . . . . . . . . . . 36,458 36,460 36,635 36,398
Effect of common stock options 3,091 1,562 2,836 899
------ ------ ------ ------
Diluted EPS. . . . . . . . . . 39,549 38,022 39,471 37,297
====== ====== ====== ======
</TABLE>
All options to purchase shares of common stock were included in the
computation of diluted EPS for 1998.
<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.
In June 1998, Statement of Financial Accounting Standard No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133") was issued,
effective for fiscal years beginning after June 15, 1999, with earlier
adoption encouraged. SFAS 133 requires companies to record derivative
instruments on the balance sheet as assets and liabilities, measured at fair
value. Gain or losses resulting from changes in the values of those
derivatives are accounted for depending on the use of the derivative. The
Company does not enter into derivative instruments except occasionally to
hedge the foreign currency exchange and interest rate risk of specific
projected transactions. The Company was not holding any derivative
instruments at December 31, 1997. At September 30, 1998, the Company had a
foreign currency forward contract with a notional amount of 1,000,000 British
pounds and a fair market value of $78,500.
OTHER MATTERS
Certain prior period amounts have been reclassified to conform to current
period presentation.
<PAGE>
NOTE 2. ACQUISITIONS
On August 31, 1998, the Company purchased 100% of the outstanding common
stock of The Leverage Group ("TLG") for $25 million in cash. An independent
appraiser estimated the fair market value of the assets acquired and
liabilities assumed including the in-process research and development
("IPR&D"). TLG owns Policy Link , a family of systems designed to support the
administrative tasks associated with administration, commission processing,
payout processing, and disbursement generation for life insurance and annuity
contracts. In addition to continuing to market certain systems, the Company
intends to integrate the family of systems with its existing product,
Cyberlife , to provide a local area network solution that administers products
ranging from traditional whole and term-life insurance to non-traditional,
wealth-accumulation products including annuities and variable annuities. The
Company recorded acquisition charges of approximately $3.7 million related to
the purchase of TLG.
Approximately $2.0 million of these charges represent estimated purchased
IPR&D based on the income approach valuation method. This amount reflects the
fair value of a single subsystem that is not being marketed and will be used
in the Company's research and development activities. Consistent with the
Company's basis of accounting for costs incurred to develop its software this
subsystem is not capitalizable under Statement of Financial Accounting
Standards No. 86 "Accounting for the Costs of Computer Software to Be Sold
Leased or Otherwise Marketed" ("SFAS 86") and has no alternative future use.
The Company will spend approximately $1.0 million through 1999 to complete
integration of this subsystem. The Company believes it will successfully
integrate the family of systems with its existing product.
The remainder of the acquisition charges represents the previously
capitalized historical cost of software purchased and internal in-process
development that is no longer capitalizable based on SFAS 86 as a result of
the acquisition.
NOTE 3. CONTINGENCIES
The Company is 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.
<PAGE>
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 4. 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 provided information services,
principally physician reports and medical histories, to US life insurers. This
segment was sold in May 1998 and is presented as a discontinued operation.
<PAGE>
Information about the Company's operations for the three and nine months ended
September 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
------ ------ ------ ------
(In thousands)
REVENUES FROM EXTERNAL CUSTOMERS
<S> <C> <C> <C> <C>
Enterprise software and services
Property and casualty . . . . . . . . . . $ 70,343 $ 63,085 $204,912 $174,918
Life and financial solutions. . . . . . . 38,081 26,488 101,842 73,012
--------- --------- --------- ---------
Total US revenues . . . . . . . . . . . 108,424 89,573 306,754 247,930
International . . . . . . . . . . . . . . 42,879 42,382 129,859 122,936
--------- --------- --------- ---------
Total revenues from
continuing operations. . . . . . . . $151,303 $131,955 $436,613 $370,866
========= ========= ========= =========
Discontinued Operations
Information Services
Property and casualty. . . . . . . . . . $ - $ 16,408 $ - $ 64,649
Life . . . . . . . . . . . . . . . . . . - 15,704 11,968 48,608
INCOME (EXPENSE) FROM CONTINUING OPERATIONS
Enterprise software and services
Property and casualty . . . . . . . . . . $ 19,011 $ 17,988 $ 53,445 $ 46,782
Life and financial solutions. . . . . . . 9,558 5,614 24,049 16,823
Corporate and US administrative . . . . . (9,908) (6,915) (23,586) (18,853)
--------- --------- --------- ---------
Total US operating income . . . . . . . 18,661 16,687 53,908 44,752
--------- --------- --------- ---------
International . . . . . . . . . . . . . . 5,819 5,968 17,855 13,505
International administrative. . . . . . . (2,051) (1,917) (6,111) (5,102)
--------- --------- --------- ---------
Total international . . . . . . . . . . 3,768 4,051 11,744 8,403
--------- --------- --------- ---------
Operating income. . . . . . . . . . . 22,429 20,738 65,652 53,155
Equity in earnings of
unconsolidated affiliates . . . . . . . . 129 274 567 964
Minority interest . . . . . . . . . . . . . (44) - (74) -
Other income and expenses . . . . . . . . . (603) (1,007) (1,398) (2,809)
Income taxes. . . . . . . . . . . . . . . . 8,740 7,454 24,727 19,135
--------- --------- --------- ---------
Income from continuing operations . . . . $ 13,171 $ 12,551 $ 40,020 $ 32,175
========= ========= ========= =========
DISCONTINUED OPERATIONS
Information Services
Property and casualty . . . . . . . . . . $ - $ 107 $ (1,018) $ 533
Life. . . . . . . . . . . . . . . . . . . - 585 3,672 2,141
Other income and expenses . . . . . . . . - - (27) -
Income taxes. . . . . . . . . . . . . . . - (306) 2,691 1,126
--------- --------- --------- ---------
Discontinued operations, net . . . . . . $ - $ 386 $ (64) $ 1,548
========= ========= ========= =========
</TABLE>
<PAGE>
NOTE 5. DISCONTINUED OPERATIONS
The Company sold its life information services segment in May 1998 for
$23.8 million, net of selling expenses, resulting in a pretax gain of $3.0
million and an after-tax gain of $0.1 million. The difference in gain for tax
purposes primarily results from the inability to deduct goodwill related to
the sale for tax purposes. The operations of this segment are presented as
discontinued operations in the accompanying Consolidated Statements of Income.
See Note 4 for income from operations of the discontinued segment.
The Company also recognized an additional loss of $0.6 million, net of tax, on
the sale of its property & casualty information services segment. This loss
is included in discontinued operations in the accompanying Consolidated
Statements of Income.
NOTE 6. STOCK SPLIT
In May 1998, the Company's Board of Directors approved a two-for-one
stock split effected in the form of a stock dividend, whereby each shareholder
of record as of June 1, 1998, received on June 15, 1998, one additional share
of common stock for each share owned as of the record date. As a result of
the split, 18,426,691 shares were issued and $0.2 million was transferred from
Retained Earnings to Common Stock. Weighted average common shares outstanding
and per share amounts for all periods presented have been restated to reflect
the stock split. Share amounts reflected on the Consolidated Balance Sheet
and Consolidated Statements of Changes in Stockholder's Equity and
Comprehensive Income reflect the actual share amounts for each period
presented.
<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 Nine Three Nine
Months Ended Months Ended Months Months
September 30, September 30, Ended Ended
------------- -------------
1998 1997 1998 1997 September 30
----- ----- ----- ----- -----------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Licensing . . . . . . . . . . . . . 20.8% 25.2% 20.6% 24.8% (5.6)% (2.4)%
Services. . . . . . . . . . . . . . 79.2 74.8 79.4 75.2 21.5 24.3
------ ------ ------ ------
100.0 100.0 100.0 100.0 14.7 17.7
------ ------ ------ ------
Operating expenses
Cost of revenues
Employee compensation and benefits 43.0 42.4 44.2 41.7 16.2 25.1
Computer & communication expenses. 6.4 6.2 5.8 6.5 19.5 5.2
Depreciation & amortization
property, equipment &
capitalized software costs. . . . 10.3 11.2 10.8 11.6 6.1 9.9
Other costs & expenses . . . . . . 3.1 4.1 4.1 5.5 (12.2) (14.0)
Selling, general &
administrative expenses . . . . . 18.1 18.5 17.5 18.4 11.3 11.6
Amortization of goodwill and
other intangibles . . . . . . . . 1.8 1.9 1.7 2.0 9.1 3.1
Acquisition related charges
Purchased research and development. 1.3 - 0.5 - - -
Purchased and internally developed
software. . . . . . . . . . . . . 1.2 - 0.4 - - -
------ ------ ------ ------
85.2 84.3 85.0 85.7 15.9 16.8
------ ------ ------ ------
Operating income . . . . . . . . . . 14.8 15.7 15.0 14.3 8.2 23.5
Equity in earnings of unconsolidated
affiliates. . . . . . . . . . . . 0.1 0.2 0.1 0.3 (52.9) (41.2)
Other income and expenses. . . . . . (0.4) (0.7) (0.3) (0.7) (40.1) (50.2)
------ ------ ------ ------
Income from continuing operations
before income taxes. . . . . . . . 14.5 15.2 14.8 13.9 9.5 26.2
Income taxes . . . . . . . . . . . . 5.8 5.7 5.6 5.2 17.3 29.2
------ ------ ------ ------
Income from continuing operations. . 8.7 9.5 9.2 8.7 4.9 24.4
Discontinued operations, net . . . . - 0.3 - 0.4 (100.0) (104.1)
------ ------ ------ ------
Net income . . . . . . . . . . . . . 8.7% 9.8% 9.2% 9.1% 1.8% 18.5%
====== ====== ====== ======
</TABLE>
<PAGE>
THREE MONTH COMPARISON
REVENUES
<TABLE>
<CAPTION>
Three Months
Ended September 30,
-------------------
Licensing 1998 1997 Change
----- ----- ------
(Dollars in Millions)
<S> <C> <C> <C>
Initial charges. . . . . . . $14.7 $16.9 (13.0)%
Monthly charges. . . . . . . 16.8 16.4 2.0
------ ------
$31.5 $33.3 (5.6)%
====== ======
Percentage of total revenues 20.8% 25.2%
------ ------
</TABLE>
In licensing the Company's products, customers generally obligate
themselves to a non-refundable initial license charge and a monthly license
fee payable over a specified period of time, which is usually six years.
The monthly license charge entitles the customer, over the contract period, to
use the licensed product and to receive product support and enhancements.
Initial license revenues decreased $2.2 million for the third quarter of
1998 compared to the third quarter of 1997, with the following increases or
decreases by business segment: property and casualty down 2.0% ($0.1
million); life and financial solutions up 34.6% ($1.5 million); and
international down 48.1% ($3.6 million). Life and financial solutions license
revenue includes $2.3 million of activity by the Company's recent acquisition,
The Leverage Group.
Initial license charges for the third quarter of 1998 include right-to-use
licenses of $2.7 million. This compares to $3.7 million in right-to-use
licenses for the third quarter of 1997. Right to use licenses represent the
acquisition by certain customers of the right to use element of their
remaining monthly license charge obligation, if any, plus the acquisition of a
perpetual right to use the product thereafter. These types of licenses have
been offered to customers by the Company with increasing frequency over the
past three years and are beginning, and will continue, to mitigate the future
monthly license charge growth rate. Initial license charges also include
termination charges (related to the buyout of monthly license charges) of $0.9
million for the third quarter of 1998. There were no termination charges in
the third quarter of 1997.
Monthly license charges increased $0.4 million for the third quarter of
1998 compared to the third quarter of 1997 principally due to strong initial
licensing activity in the fourth quarter of 1997. Increases or decreases by
business segment are as follows: property and casualty unchanged; life and
financial solutions up 18.1% ($0.6 million); and international down 6.3% ($0.2
million).
<PAGE>
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
------------------- ------------------------- ----
3rd 2nd 1st 4th 3rd 2nd 1st 4th
------------------- ------------------------- ----
(Dollars in Millions)
Initial license revenues $14.7 $13.0 $12.6 $25.1 $16.9 $16.6 $11.3 $19.4
% of total revenues 9.7% 9.0% 9.0% 17.0% 12.8% 13.4% 9.8% 15.5%
<TABLE>
<CAPTION>
Three Months
Ended September 30,
-------------------
Services 1998 1997 Change
----- ----- ------
(Dollars In Millions)
<S> <C> <C> <C>
Professional and outsourcing $118.6 $97.6 21.5%
Information. . . . . . . . . 0.1 0.1 39.0
Other. . . . . . . . . . . . 1.1 0.9 15.5
------- ------
$119.8 $98.6 21.5%
======= ======
Percentage of total revenues 79.2% 74.8%
------- ------
</TABLE>
Professional and outsourcing services revenues increased $21.0 million for the
third quarter of 1998 compared to the third quarter of 1997, with the
following increases by business segment: domestic property and casualty up
14.7% ($7.1 million); life insurance and financial solutions up 49.9% ($9.4
million); and international up 15.0% ($4.5 million). The increases are
principally due to increases in both 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 16.2% for the third quarter
of 1998 compared to the third quarter of 1997. The net increase results
principally from higher salaries and related costs associated with the growth
in professional services staffing being somewhat offset by the transfer of
certain employee costs to computer and communication expenses as a result of
the Company's data center outsourcing agreement with Lockheed Martin
Corporation ("Lockheed Martin"). Had these employee costs not been
transferred, third quarter 1998 employee compensation and benefits would have
increased 19.7% by comparison to the same period last year. Compensation and
benefits increased 18.7% ($2.9 million) internationally and 15.3% ($6.2
million) domestically.
<PAGE>
Computer and communications expenses increased 19.5% for the third quarter of
1998 compared to the third quarter of 1997. At the beginning of the third
quarter, the Company entered into a data center outsourcing agreement with
Lockheed Martin. As a result, certain costs previously included in employee
compensation and benefits are now included in computer and communications
expense. On a comparative basis, the data center outsourcing agreement has
resulted in savings.
Depreciation and amortization of property, equipment and capitalized
software costs increased 6.1% for the third quarter of 1998 compared to the
third quarter of 1997, principally due to higher amortization expense
resulting from the various releases of the Company's internally developed
software products.
Other operating costs and expenses decreased 12.2% for the third quarter
of 1998 compared to the third quarter of 1997, principally due to lower
consultant and contract loss expenses, partially offset by decreased amounts
of capitalized software development costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 11.3% for the
third quarter of 1998 compared to the third quarter of 1997, principally due
to increased commission, bonus, and other salary costs.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles increased 9.1% for the
third quarter of 1998 compared to the third quarter of 1997, principally due
to increased amortization related to the acquisition of The Leverage Group.
OPERATING INCOME
1998 third quarter operating income increased 8.2% compared to 1997 third
quarter operating income. Increases or decreases in segment operating income
were: property and casualty increased 5.7%, life and financial solutions
increased 70.3% and international decreased 2.5%. The increase in operating
income is primarily related to increases in professional services and
outsourcing revenues while operating costs increased at a slower rate than the
related revenue.
OTHER INCOME AND EXPENSE
Interest expense decreased 27.9% for the third quarter of 1998 compared
to the third quarter of 1997, principally due to lower levels of borrowed
funds under the Company's credit facility and capitalization of interest on
construction in progress. The average nominal interest rate applicable to
borrowings under the Company's credit facility during the third quarter of
1998 was 5.9%.
<PAGE>
INCOME TAXES
The effective income tax rate (income taxes expressed as a percentage of
pre-tax income) was 39.9% and 37.3% for the third quarters of 1998 and 1997,
respectively. The effective rate for the third quarter of 1998 is higher than
the federal statutory rate principally due to the effect of state and local
income taxes.
DISCONTINUED OPERATIONS
There were no operating results in the third quarter of 1998.
NINE MONTH COMPARISON
REVENUES
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
Licensing 1998 1997 Change
----- ----- ------
(Dollars in Millions)
<S> <C> <C> <C>
Initial charges. . . . . . . $40.3 $44.8 (10.0)%
Monthly charges. . . . . . . 49.4 47.1 4.8
------ ------
$89.7 $91.9 (2.4)%
====== ======
Percentage of total revenues 20.6% 24.8%
------ ------
</TABLE>
Initial license revenues decreased $4.5 million for the first nine months
of 1998 compared to the same period in 1997, with the following increases or
decreases by business segment: property and casualty up 17.5% ($1.9 million);
life and financial solutions down 18.3% ($2.9 million); and international down
19.9% ($3.5 million).
Initial license charges for the first nine months of 1998 include right-to-use
licenses of $9.7 million. This compares to $5.6 million in right-to-use
licenses for the same period of 1997. Initial license charges also include
termination charges (related to the buyout of monthly license charges) of $1.3
million for the first nine months of 1998 compared to $0.2 million for the
first nine months of 1997. Additionally, initial license charges include
license agreements of $2.2 million for the second quarter of 1998 with the
purchaser of the discontinued life information services segment and $1.8
million for the third quarter of 1997 with the purchaser of the discontinued
property & casualty information services segment. Life and financial
solutions license revenue for the third quarter of 1998 includes $2.3 million
of activity by the Company's recent acquisition, The Leverage Group.
Monthly license charges increased $2.3 million for the first nine months of
1998 compared to the same period in 1997 principally due to strong initial
licensing activity in the fourth quarter of 1997. Increases or decreases by
business segment are as follows: property and casualty unchanged; life and
financial solutions up 20.9% ($1.8 million); and international up 4.5% ($0.5
million).
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
Services 1998 1997 Change
----- ----- ------
(Dollars In Millions)
<S> <C> <C> <C>
Professional and outsourcing $343.4 $274.9 24.9%
Information. . . . . . . . . 0.5 0.5 7.8
Other. . . . . . . . . . . . 3.0 3.6 (17.9)
------- -------
$346.9 $279.0 24.3%
======= =======
Percentage of total revenues 79.4% 75.2%
------- -------
</TABLE>
Professional and outsourcing services revenues increased $68.5 million
for the first nine months of 1998 compared to the same period in 1997, with
the following increases by business segment: domestic property and casualty
up 21.5% ($28.8 million); life insurance and financial solutions up 61.5%
($29.8 million); and international up 10.7% ($9.9 million). The increases are
principally due to increases in both 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 25.1% for the first nine
months of 1998 compared to the same period in 1997. The net increase results
principally from higher salaries and related costs associated with the growth
in professional services staffing being somewhat offset by the transfer of
certain employee costs to computer and communication expenses as a result of
the Company's data center outsourcing agreement with Lockheed Martin. Had
these employee costs not been transferred, the first nine months 1998 employee
compensation and benefits would have increased 26.3% by comparison to the same
period last year. Compensation and benefits increased 21.3% ($9.8 million)
internationally and 26.7% ($28.9 million) domestically.
Computer and communications expenses increased 5.2% for the first nine months
of 1998 compared to the same period in 1997. At the beginning of the third
quarter, the Company entered into a data center outsourcing agreement with
Lockheed Martin. As a result, certain costs previously included in employee
compensation and benefits are now included in computer and communications
expense. On a comparative basis, the data center outsourcing agreement has
resulted in savings.
Depreciation and amortization of property, equipment and capitalized
software costs increased 9.9% for the first nine months of 1998 compared to
the same period in 1997, principally due to higher amortization expense
resulting from the various releases of the Company's internally developed
software products.
<PAGE>
Other operating costs and expenses decreased 14.0% for the first nine months
of 1998 compared to the same period in 1997, principally due to lower
consultant, contract loss and bad debt expenses, partially offset by increased
facility costs and decreased amounts of capitalized software development
costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 11.6% for the
first nine months of 1998 compared to the same period in 1997, principally due
to increased bonus, commission, and advertising costs, partially offset by
decreased third party commissions.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles increased 3.1% for the
first nine months of 1998 compared to the same period in 1997, principally due
to increased amortization related to the acquisition of The Leverage Group.
OPERATING INCOME
1998 nine month operating income increased 23.5% compared with 1997 nine
month operating income. Increases in segment operating income were: property
and casualty increased 14.2%, life and financial solutions increased 43.0% and
international increased 32.2%. The increase in operating income is primarily
related to increases in professional services and outsourcing revenues while
operating costs increased at a slower rate than the related revenue.
OTHER INCOME AND EXPENSE
Interest expense decreased 37.4% for the first nine months of 1998
compared to the same period in 1997, principally due to lower levels of
borrowed funds under the Company's credit facility and capitalization of
interest on construction in progress. The average nominal interest rate
applicable to borrowings under the Company's credit facility during the first
nine months of 1998 was 5.9%.
INCOME TAXES
The effective income tax rate (income taxes expressed as a percentage of
pre-tax income) was 38.2% and 37.3% for the nine months ended September 30,
1998 and 1997, respectively. The effective rate for the first nine months of
1998 is higher than the federal statutory rate principally due to the effect
of state and local income taxes.
DISCONTINUED OPERATIONS
Loss from discontinued operations increased for the first nine months of 1998
compared to the same period in 1997, principally due to (i) an additional loss
of $0.6 million recognized during the second quarter of 1998 on the sale
<PAGE>
of the property & casualty information services segment; (ii) partial year
operating results in the first nine months of 1998 compared to full year
operating results in the first nine months of 1997 for the life information
services segment; and (iii) no operating results in the first nine months of
1998 compared to eight months operating results in the first nine months of
1997 for the property & casualty information services segment.
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. The Company formed a strategic alliance for systems
outsourcing with Integrated Business Solutions, a unit of Lockheed Martin. In
June 1998, a Data Processing Services Agreement was completed and under its
terms, the Company turned over operation of its Blythewood, South Carolina,
data center to Lockheed Martin on July 1, 1998. As part of the transaction,
the Company transferred to Lockheed Martin substantially all of the data
processing equipment used in the data center operations, at net book value of
approximately $11.3 million, to be paid in January 1999.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
- ---------------------------------------------------
(Dollars in Millions)
<S> <C> <C>
Cash and equivalents, marketable
securities, and investments. . $ 24.9 $ 46.5
Current assets . . . . . . . . . 192.1 185.8
Current liabilities. . . . . . . 77.4 86.2
Working capital. . . . . . . . . 114.7 99.6
Long-term debt . . . . . . . . . 77.0 37.7
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
- ------------------------------------------------------
(Dollars in Millions)
<S> <C> <C>
Cash provided by operations. . . . $ 68.8 $ 63.7
Cash used for investing activities (81.7) (64.9)
Cash used for financing activities (1.7) (3.6)
</TABLE>
The Company's current ratio (current assets divided by current
liabilities) stood at 2.5 at September 30, 1998, which management believes is
sufficient when combined with the available credit facility to provide for
day-to-day
<PAGE>
operating needs and the flexibility to take advantage of investment
opportunities. The Company has available (net of amounts outstanding at
September 30, 1998) $123 million of its $200 million credit facility. The
Company also has available a $15 million uncommitted operating line of credit.
During the nine months ended September 30, 1998 the Company capitalized
software development costs of $43.6 million, principally related to the
development of its S3+ client/server property and casualty software,
CyberLife object-oriented client/server life insurance software, and I+
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 computer 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, along with currently
available borrowing capacity, will be able to meet presently anticipated
needs.
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;
<PAGE>
- - 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 spending 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
General
- -------
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 of the Year 2000 and
beyond.
Beginning in the fourth quarter of 1997, the Company initiated
consolidation of its Year 2000 activities under a centralized Year 2000
Project Office. Prior to that, individual business units were responsible for
the assessment, remediation, validation and implementation of Year 2000
corrective actions.
There are seven phases that are included in the Company's Year 2000
project:
<PAGE>
Planning - Educating the organization on Year 2000 issues and concerns, the
readiness efforts necessary and preparing for the next phase of the Year 2000
readiness project.
Inventory - Cataloguing all organizational components, including products,
external or internal interfaces, hardware and software that may require
remediation and testing to adequately address Year 2000 concerns.
Triage - Prioritizing and categorizing all products, equipment, interfaces,
data, and facilities identified during the Inventory phase. Emphasis is
placed on the identification of: all mission critical components, those that
are least important, and those that fall in the middle.
Assessment - Identifying areas requiring remediation for every aspect of each
component identified in the Triage phase as mission critical.
Remediation - Repairing, replacing, or retiring components based on the work
identified during the Assessment phase. Unit tests on repaired applications
are also included in this phase.
Testing - Testing components that were repaired. Such tests include both
system tests and integrated tests in test environments with machine dates
advanced to reflect dates in the years 1999 and 2000.
Implementation - Migrating systems, applications, and hardware to production
environments, installation of replacement systems and the retirement of
designated components, as well as finalizing, documenting and taking care of
residual activities. This phase also includes the compilation and retention
of supporting documentation that conforms to prescribed corporate standards.
All phases are currently scheduled to be completed by August 31, 1999.
The Year 2000 issue may potentially affect the Company in four areas: its
product offerings, its service offerings, its internal systems, and its
suppliers and trading partners.
Product Offerings
- ------------------
The Company has updated the code of its primary product offerings to
process dates across the century boundary. Current testing has confirmed the
ability of the applications to process data in both centuries. Beyond that,
continuous testing is scheduled for the first half of 1999 in an environment
simulating a processing date after January 1, 2000 (Year 2000 environment).
This additional testing seeks to confirm that no unanticipated problems will
occur due to third party products with which the Company's applications are
designed to operate. The Company is also in the process of conducting an
inventory and assessment of other Company and third-party products previously
licensed by the Company to customers to determine if they require any
remediation efforts. The Company anticipates completing this inventory and
assessment by December 31, 1998.
Service Offerings
- ------------------
The Company has completed Year 2000 application code remediation for all
domestic property and casualty customers who will be Business Process
Outsourcing ("BPO")/Information Technology Outsourcing ("ITO") customers after
December 31, 1999. Live customer data is currently being processed on these
<PAGE>
remediated applications in a production environment. Additional testing is
scheduled for the first half of 1999 in a Year 2000 environment to confirm
that no unanticipated problems will occur due to third party products with
which the Company's applications are designed to operate. The Company has a
limited number of BPO/ITO customers in its Life and Financial Solutions
Enterprise Software and Services and International segments for whom Year 2000
remediation efforts continue. These efforts, including related testing in a
Year 2000 environment, are scheduled to be completed in the second quarter of
1999.
Internal Systems
- -----------------
Internal systems consist primarily of third-party products used by the
Company for its internal operations which include data center hardware and
software, internal financial and human resource systems, and network and PC
hardware and software. The Company's Blythewood data center has completed its
hardware and operating software inventory and has substantially completed the
assessment, remediation, and testing efforts of updating these hardware and
software assets for Year 2000 requirements. As of July 1, 1998, Lockheed
Martin took over the data processing equipment and operational control of the
Blythewood data center and remaining remediation efforts will be coordinated
with it. The Company's Illinois, Australian, and European data centers have
also completed their inventories and are currently in the Assessment phase for
hardware and operating software enhancements required for Year 2000
remediation. Assessment is scheduled for completion by March 31, 1999 with
final implementation scheduled for completion by June 30, 1999.
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 substantially
operational, is designed to meet Year 2000 requirements, and is scheduled to
be fully operational at the end of 1998.
The Company is inventorying and assessing all of its network and PC hardware
and software to determine if any Year 2000 remediation upgrades will be
required. This inventory and assessment phase is scheduled for completion in
the first quarter of 1999 and any required remediation will commence
immediately thereafter. The Company is also assessing its readiness with
respect to non-IT systems which relate primarily to the ordinary maintenance
and operation of its physical facilities, such as elevators, heating and air
conditioning.
Suppliers and Trading Partners
- ---------------------------------
The Company's ability to operate is dependent on relationships with
certain suppliers and trading partners, such as electric utilities and
telephone companies, who provide services to the Company's various offices and
data centers ("mission critical suppliers and trading partners"). The Company
expects to complete the process of identifying all potential mission critical
suppliers and trading partners by December 31, 1998. In the first quarter of
1999, the Company will commence its planned process of evaluating mission
critical supplier and trading partner Year 2000 readiness. Any identified
<PAGE>
mission critical third party systems and data interfaces will be tested, to
the extent practical, in a Year 2000 environment. The Company will seek
substantive assurances from its mission critical suppliers and trading
partners as to their Year 2000 readiness where actual testing is impractical
or impossible. The Company's ability to influence cooperation is partially
dependent on the significance of the Company's relationship with its suppliers
and trading partners. The Company anticipates completing this phase of its
Year 2000 readiness project in the second quarter of 1999.
Year 2000 Costs
- -----------------
Since 1995, the Company estimates that it has incurred approximately $6.7
million of costs in addressing Year 2000 remediation issues. Based on the
Company's experience to date, it is not anticipated that the completion of the
remaining Year 2000 remediation efforts will have a material adverse effect
upon the Company's financial position or results of operations. The Company's
past and anticipated future remediation costs are funded by operations.
Year 2000 Risks
- -----------------
The Company's products are designed to be used with and require use of
third-party products, such as operating systems and compilers. Also,
customers often modify the Company's products to suit their unique
requirements. If these third parties experience Year 2000 failures of their
products, or if customers experience system failures as a result of their
modifications or for other reasons, the Company could become involved in
disputes or litigation related to the cause of such system failures.
In addition, the failure to correct material Year 2000 problems could result
in an interruption in, or a failure of, certain normal business activities or
operations and litigation. Such failures could materially and adversely
affect the Company's results of operations, liquidity and financial condition.
Due to the general uncertainty inherent in the Year 2000 problem, resulting in
part from the uncertainty of the Year 2000 readiness of third-party suppliers
and the Company's customers and prospective customers, the Company is unable
to determine at this time whether the consequences of Year 2000 failures will
have a material impact on the Company's results of operations, liquidity or
financial condition. The Year 2000 Project is expected to significantly
reduce the Company's level of uncertainty about the Year 2000 problem and, in
particular, about the Year 2000 compliance and readiness of its mission
critical suppliers and trading partners. The Company believes that, with the
implementation of new business systems and completion of the Project as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
The Company is currently developing contingency plans to minimize the effect
of such disruptions. Such contingency plans are scheduled to be completed by
June 30, 1999.
Readers are cautioned that forward-looking statements contained in this Year
2000 section should be read in conjunction with the Company's disclosures
<PAGE>
under the heading "Factors That May Affect Future Results" beginning on page
21.
EURO CONVERSION
On January, 1, 1999, certain member countries of the European Union are
scheduled to establish fixed conversion rates between their existing sovereign
currencies and the euro. The participating countries have agreed to adopt the
euro as their common legal currency on that date. It is also possible that
some of the non-participating countries may also choose to convert to the euro
at a later date. From January 1, 1999, to December 31, 2001, there will be a
transition period, during which the participating countries may conduct
transactions in either their legacy currency or the euro. On January 1, 2002,
new euro-denominated bills and coins will be issued, and by July 1, 2002, all
legacy currency bills and coins will be withdrawn, finalizing the conversion
to the euro.
The Company is currently evaluating methods to address the issues involved
with the introduction of the euro, including the conversion of its products in
the relevant markets and impacts on the processes for preparing taxation and
accounting records.
The Company is surveying licensees of its products domiciled or doing business
in the participating countries. The needs of each licensee may vary with
regards to converting to the euro depending on how and when they choose to
convert. The Company is preparing strategies to modify its products licensed
in the participating countries to convert to the euro. These modifications
will be made available to licensees for a fee. Implementation of the
modifications is the responsibility of each licensee.
Company subsidiaries are incorporated in four of the participating countries:
Germany, Austria, the Netherlands and Ireland. The Company has implemented
new financial accounting systems that will enable it to convert the affected
operations to the euro in a timely and effective manner.
Based upon the Company's experience to date, it is not anticipated that the
euro conversion will have a material impact on the Company's consolidated
financial statements.
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 above and in the Company's filings with the
Securities and Exchange Commission. These and other factors may cause actual
results to differ materially from those anticipated.
<PAGE>
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
September 30, 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: November 13, 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 as an exhibit to Form 10-Q for the quarter ended March 31, 1998
and is incorporated herein by reference)
II. Policy Management Systems Corporation Restricted Stock Ownership Plan
(filed herewith)
JJ. Form of Restricted Stock Award Agreement dated August 11, 1998 with
Messrs. Berkeley, Feddersen, Palms, Sargent, Seibels and Trub (filed herewith)
<PAGE>
27. FINANCIAL DATA SCHEDULES
A. Nine Months Ended September 30, 1998 filed herewith (EDGAR version
only)
B. Nine Months Ended September 30, 1997, as restated, filed herewith
(EDGAR version only)2
POLICY MANAGEMENT SYSTEMS CORPORATION
RESTRICTED STOCK OWNERSHIP PLAN
1. PURPOSE OF THE PLAN
This Plan shall be known as the Policy Management Systems Corporation
Restricted Stock Ownership Plan. The purpose of the Plan is to promote the
interests of the Company and its shareholders by assisting the Company's
officers and directors in satisfying stock ownership guidelines that have been
established by the Board of Directors. Participation in the Plan is mandatory
for officers and directors until they have satisfied the applicable
guidelines. The Plan also provides an opportunity for officers, directors,
managers and sales representatives of the Company to acquire additional shares
of the Company's common stock in lieu of other compensation payable from the
Company. Through the use of restricted stock, the Plan rewards employees for
productive and long-term employment with the Company, and provides a means for
the Company of retaining its key employees and directors.
2. DEFINITIONS
2.1 Definitions. Wherever the following capitalized terms are used
-----------
in this Plan they shall have the meanings specified below:
(a) "Annual Guideline Target" means the number of shares of Common
Stock that a Participant is required to acquire and hold under the Ownership
Guidelines at the end of a particular Plan Year, determined as a percentage of
the Cumulative Guideline Target applicable to the Participant (with the number
of shares rounded to the nearest whole share).
(b) "Annual Retainer" means, for any Plan Year that an Independent
Director is participating in the Plan, the aggregate amount of the annual
retainer to be paid to such Independent Director during the Plan Year. The
first calendar year for which annual retainer fees shall be taken into account
shall be 1998.
(c) "Award" means an award of Restricted Stock granted under the
Plan.
(d) "Award Agreement" means an agreement entered into between the
Company and a Participant setting forth the terms and conditions of an Award
of Restricted Stock granted to a Participant.
(e) "Board" means the Board of Directors of the Company.
(f) "Bonus Compensation" means, for any Plan Year that an Officer,
Manager or Sales Representative is participating in the Plan, any annual bonus
amount designated by the Committee for purposes of the Plan that is earned by
such Officer, Manager or Sales Representative during the Plan Year (and
payable in the following Plan
<PAGE>
Year). For the 1998 Plan Year, Bonus
Compensation for Officers and Managers will include applicable bonus amounts
earned for the full 1998 calendar year (including for periods prior to the
Effective Date), but no bonus amounts payable to Sales Representatives for
1998 shall be taken into account for purposes of the Plan.
(g) "Cause" means a good-faith finding by the Committee that
termination of employment or other service occurred as a result of any of the
following: (i) any act committed by a Participant which shall represent a
breach in any material respect of any of the terms of the Participant's
employment and which breach is not cured within 30 days of receipt by the
Participant of written notice from the Company of such breach; (ii) improper
conduct, consisting of any willful act or omission with the intent of
obtaining, to the material detriment of the Company, any benefit to which a
Participant would not otherwise be entitled; (iii) improper conduct consisting
of sexual harassment or act of moral turpitude; (iv) gross negligence,
consisting of wanton and reckless acts or omissions in the performance of a
Participant's duties to the material detriment of the Company; (v) bad faith
in the performance of a Participant's duties, consisting of willful acts or
omissions, to the material detriment of the Company, including excessive
unexcused absence from work; (vi) use of illegal drugs or unauthorized use of
alcohol in the workplace or being under the influence of illegal drugs or
alcohol while at work; or (vii) any conviction of, or plea of nolo contendere
---- ----------
to, a crime (other than a traffic violation) that constitutes a felony under
the laws of the United States or any political subdivision thereof.
(h) "Change in Control" shall have the meaning specified in Section
11 hereof.
(i) "Code" means the Internal Revenue Code of 1986, as amended.
(j) "Committee" means, subject to Section 4.4 hereof, the
Compensation Committee of the Board, or such other committee or subcommittee
of the Board appointed by the Board to administer the Plan from time to time.
(k) "Common Stock" means the common stock of the Company, par value
$.01 per share.
(l) "Company" means Policy Management Systems Corporation, a South
Carolina corporation.
(m) "Cumulative Guideline Target" means the aggregate Fair Market
Value of the Common Stock that the Participant is required to acquire and hold
under the Ownership Guidelines at the end of the time period applicable under
the Ownership Guidelines for satisfaction of all requirements thereunder (with
the number of shares rounded to the nearest whole share).
(n) "Date of Grant" means the date on which an Award under the Plan
becomes effective, as provided in Section 5.3, 6.3, 7.3 or 8.3 hereof.
<PAGE>
(o) "Disability" for any Participant means because of injury or
sickness the Participant is (i) continuously unable to perform the substantial
and material duties of the Participant's regular occupation for a period of 6
full months, (ii) under the regular care of a licensed physician; and (iii)
not gainfully employed in any occupation for which Participant is or becomes
qualified by education, training or experience.
(p) "Effective Date" means the Effective Date of this Plan, as
defined in Section 13 hereof.
(q) "Employee" means any person who the Committee determines to be an
employee of the Company or any Subsidiary.
(r) "Fair Market Value" of a share of Common Stock as of a given date
means the average closing sales price of the Common Stock on the New York
Stock Exchange as reflected on the composite index on the 10 trading days
immediately preceding the date as of which Fair Market Value is to be
determined. If the Common Stock is not listed on the New York Stock Exchange
on the date as of which Fair Market Value is to be determined, the Committee
shall determine in good faith the Fair Market Value in whatever manner it
considers appropriate.
(s) "Independent Director" means a member of the Board who is not an
Employee.
(t) "Manager" means an Employee below the level of vice-president who
the Committee, in its sole discretion, determines to be a manager of the
Company or any Subsidiary eligible to participate in the Plan.
(u) "Officer" means an Employee of the Company at a level of
vice-president or higher whose position is covered under the Ownership
Guidelines.
(v) "Ownership Guidelines" means the stock ownership guidelines for
Independent Directors and Officers of the Company adopted by the Board for
purposes of the Plan, as may be amended by the Board or the Committee from
time to time. The Ownership Guidelines, as currently in effect, are attached
hereto as Exhibit A.
(w) "Participant" means an Independent Director, Officer, Manager or
Sales Representative who receives an Award of Restricted Stock under the Plan.
(x) "Plan" means the Policy Management Systems Corporation Restricted
Stock Ownership Plan as set forth herein, as it may be amended from time to
time.
(y) "Plan Trust" means a grantor trust established by the Company for
holding and issuing shares of Common Stock deliverable as Awards under the
Plan.
(z) "Plan Year" shall mean any calendar year in which the Plan is in
effect, including the 1998 Plan Year.
<PAGE>
(aa) "Restricted Stock" means an Award entitling a Participant to
shares of Common Stock that are nontransferable and subject to forfeiture
until the specific conditions set forth in the Award Agreement are satisfied.
(bb) "Retirement" for any Participant means termination of a
Participant's employment, or other service, with the Company and its
Subsidiaries on or after attainment of the age of (i) 65 years or (ii) at
least 55 years, and Participant has been employed by or providing service to
the Company or any Subsidiary on a full time basis for the preceding 5 years.
For purposes of this definition, full time basis for the preceding 5 years
means that in each of the five 12 full calendar months preceding termination,
Participant was credited with no less than 1000 hours of service as an
Employee, or was serving as an Independent Director. Notwithstanding the
foregoing, the Committee may, in its discretion, prescribe an alternative
meaning of the term "Retirement" for a Participant under the Plan in special
circumstances.
(cc) "Rule 16b-3" means Rule 16b-3 promulgated by the Securities and
Exchange Commission pursuant to the Securities and Exchange Act of 1934.
(dd) "Sales Representative" means a member of the sales force of the
Company or any Subsidiary who has been determined by the Committee to be
eligible to participate in the Plan.
(ee)"Stock Uplift" means the additional number of shares of an Award that
is intended to adjust the value of the Award for the restrictions placed upon
the Restricted Stock.
(ff) "Subsidiary" means an entity that is wholly owned, directly or
indirectly, by the Company, or any other affiliate of the Company that is so
designated, from time to time, by the Committee.
3. SHARES OF COMMON STOCK SUBJECT TO THE PLAN
3.1 Number of Shares. Subject to the following provisions of this
----------------
Section 3, the aggregate number of shares of Common Stock that may be issued
pursuant to all Awards under the Plan is 500,000 shares of Common Stock. The
shares of Common Stock to be delivered under the Plan will be made available
from authorized but unissued shares, from shares that are purchased in the
open market held in the Plan Trust, or otherwise from shares that are
purchased in the open market for purposes of the Plan. If any share of Common
Stock that is the subject of an Award is not issued and ceases to be issuable
for any reason, or is forfeited, cancelled or returned to the Company or the
Plan Trust for failure to satisfy vesting requirements or upon the occurrence
of other forfeiture events, or is returned to the Company or the Plan Trust in
satisfaction of any withholding tax liability arising in respect of an Award,
such share of Common Stock will no longer be charged against the foregoing
maximum share limitation and may again be made subject to Awards under the
Plan.
<PAGE>
3.2 Adjustments. If there shall occur any recapitalization,
-----------
reclassification, stock dividend, stock split, reverse stock split or other
distribution with respect to the shares of Common Stock, or any similar
corporate transaction or event in respect of the Common Stock, then the
Committee shall, in the manner and to the extent that it deems appropriate and
equitable to the Participants and consistent with the terms of this Plan,
cause a proportionate adjustment to be made in the maximum numbers and kind of
shares provided in Section 3.1 hereof and the number and kind of shares of
Common Stock subject to the then-outstanding Awards.
3.3 Phantom Stock Reserve. The Committee shall have the
-----------------------
discretionary authority, exercised at the time an Award is approved, to
substitute for any Award of Restricted Stock that would otherwise be made
under the Plan an Award of "phantom stock" under the Plan. An Award of
phantom stock will entitle a Participant to payments upon the completion of
the applicable vesting periods based on the Fair Market Value of the Common
Stock for the number of phantom stock units awarded, in either cash or in
shares of Common Stock (provided that at the time of vesting a sufficient
number of shares are available under Section 3.1 hereof), but otherwise
subject to the same terms and conditions as an Award of Restricted Stock under
the Plan, except that a holder of phantom stock units shall not be entitled to
voting rights in respect thereof.
4. ADMINISTRATION OF THE PLAN
4.1 Committee Members. Except as provided in Section 4.4 hereof, the
-----------------
Plan will be administered by the Committee which, to the extent deemed
necessary or appropriate by the Board, will consist of two or more persons who
satisfy the requirements for a "nonemployee director" under Rule 16b-3. The
Committee may exercise such powers and authority as may be necessary or
appropriate for the Committee to carry out its functions as described in the
Plan. No member of the Committee will be liable for any action or
determination made in good faith by the Committee with respect to the Plan or
any Award under it.
4.2 Committee Authority. The Committee has discretionary authority
-------------------
to interpret the Plan, to make all factual determinations under the Plan, and
to determine the terms and provisions of the respective Award Agreements and
to make all other determinations necessary or advisable for Plan
administration. The Committee has authority to prescribe, amend, and rescind
rules and regulations relating to the Plan. All interpretations,
determinations, and actions by the Committee will be final, conclusive, and
binding upon all parties.
4.3 Discretionary Adjustments. The Committee retains the discretion
-------------------------
to make adjustments from time to time in the Ownership Guidelines and the
degree of achievement of the Ownership Guidelines that is applicable to any
Participant other than an Independent Director for purposes of an Award under
the Plan. The basis for making such an adjustment shall include, but shall
not be limited to (i) unforeseen circumstances or unusual events that result
in less than full Bonus Compensation being paid for a Plan
<PAGE>
Year and (ii)
financial or other personal hardship where fairness and equity would warrant
and adjustment to the Award. The Committee may in its discretion accelerate
the vesting of an Award of Restricted Stock at any time or on the basis of any
specified event.
4.4 Awards to Independent Directors. With respect to Awards to
--------------------------------
Independent Directors, the Plan is intended to constitute a "formula plan"
within the meaning of Rule 16b-3 and, accordingly, such Awards shall not be
subject to discretionary determinations or adjustments by the Committee as
provided in Section 4.3 hereof. The foregoing is not intended to limit the
Committee's interpretive authority under Section 4.2 hereof, or any other
authority of the Committee under the Plan that is not inconsistent with Awards
to Independent Directors complying with the "formula plan" requirements.
5. OFFICERS
5.1 Mandatory Participation. Any Officer who has not achieved his
-----------------------
Cumulative Guideline Target as of the end of any Plan Year shall participate
in the Plan for such Plan Year in accordance with the following:
(a) Any such Officer who has achieved his Annual Guideline Target as
of the end of a Plan Year shall receive 50% of his Bonus Compensation for the
Plan Year in cash. Such Officer shall receive an Award of Restricted Stock in
a number of shares determined by dividing (i) 50% of the Bonus Compensation
for the Plan Year, plus a Stock Uplift equal to one-half of such 50% of Bonus
Compensation, by (ii) the Fair Market Value of a share of Common Stock on the
Date of Grant.
(b) Any such Officer who has not achieved his Annual Guideline Target as
of the end of a Plan Year shall receive none of his Bonus Compensation for the
Plan Year in cash. Such Officer shall receive an Award of Restricted Stock in
a number of shares determined by dividing (i) 100% of the Bonus Compensation
for the Plan Year, plus a Stock Uplift equal to 25% of such Bonus
Compensation, by (ii) the Fair Market Value of a share of Common Stock on the
Date of Grant
5.2 Participation Opt-Out. Any Officer who has achieved his
----------------------
Cumulative Guideline Target as of the end of any Plan Year may elect not to
participate in the Plan for such Plan Year by notifying the manager of
Personnel Resources and Development of the Company of such election by not
later than the earlier of (i) January 15 following the end of such Plan Year,
or (ii) the date on which the Board approves the Bonus Compensation for such
Plan Year. The election shall be made in such manner as shall be provided by
the Committee, and the Participant shall be required to establish to the
satisfaction of the Committee that the Participant has achieved the Cumulative
Guideline Target as of the end of the applicable Plan Year. If such Officer
does not make this election, he shall participate in the Plan for the Plan
Year on the same basis as described in 5.01(a) hereof.
<PAGE>
5.3 Date of Grant. The Date of Grant of an Award of Restricted Stock
-------------
to an Officer shall be the date determined by the Committee for the Award to
become effective, provided that the Date of Grant shall not be earlier than
the date that the Bonus Compensation to which such Award relates would
otherwise be paid to the Participant.
6. INDEPENDENT DIRECTORS
6.1 Mandatory Participation. Any Independent Director who has not
-----------------------
achieved his Cumulative Guideline Target as of the end of any Plan Year shall
participate in the Plan for the next following Plan Year in accordance with
the following:
(a) Any such Independent Director who has achieved his Annual
Guideline Target as of the end of a Plan Year shall receive 50% of the Annual
Retainer for the next following Plan Year in cash. Such Independent Director
shall receive an Award of Restricted Stock in a number of shares determined by
dividing (i) the remaining 50% of the Annual Retainer for the Plan Year, plus
a Stock Uplift equal to one-half of such 50% of the Annual Retainer, by (ii)
the Fair Market Value of a share of Common Stock on the Date of Grant.
(b) Any such Independent Director who has not achieved his Annual
Guideline Target as of the end of a Plan Year shall receive none of his Annual
Retainer for the next following Plan Year in cash. Such Independent Director
shall receive an Award of Restricted Stock in a number of shares determined by
dividing (i) 100% of his Annual Retainer for the Plan Year, plus a Stock
Uplift equal to 25% of such Annual Retainer, by (ii) the Fair Market Value of
a share of Common Stock on the Date of Grant.
6.2 Participation Opt-Out. Any Independent Director who has achieved
---------------------
his Cumulative Guideline Target as of the end of any Plan Year may elect not
to participate in the Plan for the next following Plan Year by notifying the
manager of Personnel Resources and Development of the Company of such election
by not later than the January 15 of the Plan Year to which such election
relates. The election shall be made in such manner as shall be provided by
the Committee, and the Participant shall be required to establish to the
satisfaction of the Committee that the Participant has achieved the Cumulative
Guideline Target as of the end of the applicable Plan Year. If such
Independent Director does not make this election, he shall participate in the
Plan for such year on the same basis as described in 6.01(a) hereof.
6.3 Date of Grant. The Date of Grant of an Award of Restricted Stock
-------------
to an Independent Director shall be the date determined by the Committee for
the Award to become effective. Unless otherwise provided by the Committee,
the Date of Grant shall be March 1 of the Plan Year for which the applicable
Annual Retainer would otherwise be paid. Notwithstanding the foregoing, the
Date of Grant of an Award made under Section 6.4 hereof shall be the date of
adoption of the Plan.
6.4 1998 Plan Year. Notwithstanding the foregoing provisions of this
--------------
Section 6, upon the adoption of the Plan by the Board, each Independent
Director shall be
<PAGE>
granted an Award of Restricted Stock in a number of shares
determined by dividing (i) 50% of the Annual Retainer paid and payable with
respect to the full 1998 Plan Year, plus a Stock Uplift equal to one-half of
such 50% of the Annual Retainer, by (ii) the Fair Market Value of a share of
Common Stock on the Date of Grant. Subject to the foregoing, the Independent
Director shall receive no further cash payments of the Annual Retainer for
1998 following the Date of Grant.
7. MANAGERS
7.1 Voluntary Participation. All Managers determined by the
------------------------
Committee to be eligible for participation in the Plan for a Plan Year may
elect to participate in the Plan on a voluntary basis. Managers who elect to
participate in the Plan for a Plan Year will receive 50% of their Bonus
Compensation applicable to such Plan Year in cash. Such Managers will also
receive an Award of Restricted Stock in a number of shares determined by
dividing (a) 50% of such Bonus Compensation, plus a Stock Uplift equal to
one-half of such 50% of Bonus Compensation, by (b) the Fair Market Value of a
share of Common Stock on the Date of Grant.
7.2 Elections. Managers will be notified of their eligibility to
---------
participate in the Plan for Bonus Compensation earned and payable with respect
to a Plan Year. Managers may elect to participate in the Plan for such Plan
Year by notifying the manager of Personnel Resources and Development of the
Company of such election on such forms and in such manner as may be provided
for by the Committee on or before December 15 of such year, or such other date
as may be contained in the notice of eligibility.
7.3 Date of Grant. The Date of Grant of an Award of Restricted Stock
-------------
to a Manager shall be the date determined by the Committee for the Award to
become effective, provided that the Date of Grant shall not be earlier than
the date that the Bonus Compensation to which such Award relates would
otherwise be paid to the Participant.
8. SALES REPRESENTATIVES
8.1 Voluntary Participation. All Sales Representatives determined by
-----------------------
the Committee to be eligible to participate in the Plan for a Plan Year may
elect to participate in the Plan on a voluntary basis. Sales Representatives
who elect to participate in the Plan for a Plan Year will receive 50% of their
Bonus Compensation applicable to such Plan Year in cash. Such Sales
Representatives will also receive an Award of Restricted Stock in a number of
shares determined by dividing (a) 50% of such Bonus Compensation, plus a Stock
Uplift equal to one-half of such 50% of Bonus Compensation, by (b) the Fair
Market Value of a share of Common Stock on the Date of Grant.
8.2 Elections. At the beginning of a Plan Year, Sales
---------
Representatives will be notified of their eligibility to participate in the
Plan for Bonus Compensation earned and payable with respect to such year.
Sales Representatives may elect to participate in
<PAGE>
the Plan for such Plan Year
by notifying the manager of Personnel Resources and Development of the Company
of such election on such forms and in such manner as may be provided for by
the Committee on or before December 15 of such year, or such other date as may
be contained in the notice of eligibility.
8.3 Date of Grant. The Date of Grant of an Award of Restricted Stock
-------------
to a Sales Representative shall be the date determined by the Committee for
the Award to become effective, provided that the Date of Grant shall not be
earlier than the date that the Bonus Compensation to which such Award relates
would otherwise be paid to the Participant.
9. RESTRICTED STOCK
9.1 Grants of Restricted Stock. An Award of Restricted Stock
-----------------------------
represents shares of Common Stock that are subject to the restrictions on
transfer and other incidents of ownership, vesting requirements and forfeiture
conditions described below. All Awards (other than Awards to Independent
Directors) will be approved by the Committee. Awards of Restricted Stock may
be made in whole shares only, with the number of shares that would be awarded
or would become vested under any provision of the Plan to be rounded upward or
downward to the nearest whole share, as applicable. Each Award will be
evidenced by an Award Agreement as described in Section 10 hereof.
9.2 Vesting Requirements. Subject to Section 9.3, the restrictions
--------------------
imposed on an Award of Restricted Stock shall lapse with respect to 20 percent
of the number of shares of Common Stock covered thereby on each the first
through the fifth anniversaries of January 1 of the year in which the Award is
made, provided that the Participant remains as an Employee or Independent
Director (as the case may be) on each such date. Upon the death, Retirement or
Disability of a Participant, or upon a Change in Control, the restrictions
imposed on any unvested portion of an outstanding Award shall immediately
lapse. In the event that an Independent Director is nominated but is not
re-elected as a director of the Board by the shareholders of the Company, the
restrictions imposed on any unvested portion of an outstanding Award held by
such Independent Director shall immediately lapse.
9.3 Forfeiture Events. In the event a Participant voluntarily terminates
-----------------
his employment or other service with the Company prior to full vesting of any
outstanding Award under the Plan, any unvested portion of such Award will be
immediately forfeited. If the employment or other service of a Participant is
terminated by the Company for Cause prior to full vesting of any outstanding
Award, any unvested portion of such Award will be immediately forfeited. If
the employment or other service of a Participant is terminated by the Company
other than for Cause prior to full vesting of any outstanding Award (i) any
unvested portion of a Stock Uplift included in such Award will be immediately
forfeited (applying the shares covered by the Stock Uplift on a pro-rata
<PAGE>
basis over the vesting period) and (ii) any unvested portion of the remainder
of the Award shall be immediately vested.
9.4 Restrictions. Shares of Restricted Stock may not be transferred,
------------
assigned or subject to any encumbrance, pledge or charge until all applicable
restrictions are removed or expire or unless otherwise allowed by the
Committee. The Committee may require the Participant to enter into an escrow
agreement providing that the certificates representing Restricted Stock
granted or sold pursuant to the Plan will remain in the physical custody of an
escrow holder (which may be the Plan Trust) until all restrictions are removed
or expire. Failure to satisfy any applicable restrictions shall result in the
subject shares of Restricted Stock being forfeited and returned to the Company
or the Plan Trust. The Committee may require that certificates representing
Restricted Stock granted under the Plan bear a legend making appropriate
reference to the restrictions imposed. At the time all restrictions imposed
on an Award of Restricted Stock lapse in accordance with the Plan, a stock
certificate for the appropriate number of shares of Common Stock, free of the
restrictions and restrictive stock legend (other than as required under the
Securities Act of 1933 or otherwise), shall be delivered to the Participant or
his beneficiary or estate, as the case may be.
9.5 Rights as Shareholder. Subject to the foregoing provisions of
---------------------
this Section 9 and the applicable Award Agreement, the Participant will have
all rights of a shareholder with respect to shares of Restricted Stock granted
to him, including the right to vote the shares and receive all dividends and
other distributions paid or made with respect thereto, unless the Committee
determines otherwise at the time the Restricted Stock is granted, as set forth
in the Award Agreement.
9.6 Section 83(b) Election. The Committee may provide in an Award
----------------------
Agreement that the Award of Restricted Stock is conditioned upon the
Participant refraining from making an election with respect to the Award under
Section 83(b) of the Code. Irrespective of whether an Award is so
conditioned, if a Participant makes an election pursuant to Section 83(b) of
the Code with respect to an Award of Restricted Stock, the Participant shall
be required to promptly file a copy of such election with the Company.
10. AWARD AGREEMENTS
10.1 Form of Agreement. Each Award of Restricted Stock under this
-----------------
Plan shall be evidenced by an Award Agreement in a form approved by the
Committee setting forth the number of shares of Common Stock subject to the
Award and the time or times at which an Award will become vested. The Award
Agreement shall also set forth other material terms and conditions applicable
to the Award as determined by the Committee consistent with the limitations of
this Plan.
10.2 Contract Rights; Amendment. Any obligation of the Company to
--------------------------
any Participant with respect to an Award shall be based solely upon
contractual obligations created by an Award Agreement. No Award shall be
enforceable until the
<PAGE>
Award Agreement has been signed on behalf of the Company
by its authorized representative and signed by the Participant and returned to
the Company. By executing the Award Agreement, a Participant shall be deemed
to have accepted and consented to the terms of this Plan and any action taken
in good faith under this Plan by and within the discretion of the Committee,
the Board or their delegates. Award Agreements covering outstanding Awards
may be amended or modified by the Committee in any manner that may be
permitted for the grant of Awards under the Plan, subject to the consent of
the Participant to the extent provided in the Award Agreement.
11. CHANGE IN CONTROL
11.1 Definition of Change in Control. For purposes of the Plan, a
-------------------------------
"Change in Control" means the occurrence of one of the following events.
(a) any "person" (as such term is defined in Section 3(a)(9) of the
Securities Exchange Act of 1934 (the "Exchange Act") and as used in Section
13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 33-1/3% or more of the combined voting
power of the Company's then outstanding securities eligible to vote for the
election of the Board (the "Company Voting Securities"); provided, however,
that the events described in this paragraph shall not be deemed to be a Change
in Control by virtue of any of the following situations: (i) an acquisition
by the Company or any of its subsidiaries; (ii) an acquisition by any employee
benefit plan or employee stock plan sponsored or maintained by the Company or
any of its subsidiaries or any trustee or fiduciary with respect to such plan;
or (iii) an acquisition by any underwriter temporarily holding Company Voting
Securities pursuant to an offering of such securities;
(b) individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof; provided, however, that any person becoming a director subsequent to
the date hereof, whose election, or nomination for election, by the Company's
shareholders was approved by a vote of at least two-thirds of the directors
comprising the Incumbent Board who are then on the Board (either by a specific
vote or by approval of the proxy statement of the Company in which such person
is named as a nominee for director, without objection to such nomination)
shall be, for purposes of this paragraph (b), considered as though such person
were a member of the Incumbent Board, but excluding for this purpose any
individual elected or nominated as a director of the Company as a result of
any actual or threatened solicitation of proxies or consents by or on behalf
of any person other than the Board;
(c) the consummation of a merger, consolidation, share exchange or
similar form of corporate reorganization of the Company or any of its
subsidiaries that requires the approval of the Company's shareholders, whether
for such transaction or the issuance of securities in connection with the
transaction or otherwise (a "Business
<PAGE>
Combination"), unless (i) immediately
following such Business Combination: (A) more than 50% of the total voting
power of the corporation resulting from such Business Combination (the
"Surviving Corporation") or, if applicable, the ultimate parent corporation
which directly or indirectly has beneficial ownership of 100% of the voting
securities eligible to elect directors of the Surviving Corporation (the
"Parent Corporation"), is represented by Company Voting Securities that were
outstanding immediately prior to the Business Combination (or, if applicable,
shares into which such Company Voting Securities were converted pursuant to
such Business Combination), and such voting power among the holders thereof is
in substantially the same proportion as the voting power of such Company
Voting Securities among the holders thereof immediately prior to the Business
Combination, (B) no person (other than any employee benefit plan or employee
stock plan sponsored or maintained by the Surviving Corporation or Parent
Corporation or any trustee or fiduciary with respect to any such plan) is or
becomes the beneficial owner, directly or indirectly, of 33-1/3% or more of
the total voting power of the outstanding voting securities eligible to elect
directors of the Parent Corporation (or, if there is no Parent Corporation,
the Surviving Corporation), and (C) at least a majority of the members of the
board of directors of the Parent Corporation (or, if there is no Parent
Corporation, the Surviving Corporation), following the Business Combination,
were members of the Incumbent Board at the time of the Board's approval of the
execution of the initial agreement providing for such Business Combination or
(ii) the Business Combination is effected by means of the acquisition of
Company Voting Securities from the Company, and prior to such acquisition a
majority of the Incumbent Board approves a resolution providing expressly that
such Business Combination does not constitute a Change in Control under this
paragraph (c); or
(d) the shareholders of the Company approve a plan of complete
liquidation or dissolution of the Company or the sale or other disposition of
all or substantially all of the assets of the Company and its subsidiaries,
other than a sale or disposition of assets to a subsidiary of the Company.
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any person acquires beneficial ownership of more than
33-1/3% of the Company Voting Securities as a result of the Acquisition of
Company Voting Securities by the Company which, by reducing the number of
Company Voting Securities outstanding, increases the percentage of shares
beneficially owned by such person; provided, that if a Change in Control would
occur as a result of such an acquisition by the Company (if not for the
operation of this sentence), and after the Company's acquisition such person
becomes the beneficial owner of additional Company Voting Securities that
increases the percentage of outstanding Company Voting Securities beneficially
owned by such person, a Change in Control shall then occur.
For purposes of this Section 11 only, the term "subsidiary" means a
corporation of which the Company owns directly or indirectly 50% or more of
the voting power.
<PAGE>
12. GENERAL PROVISIONS
12.1 No Assignment or Transfer; Beneficiaries. Awards under the Plan
-----------------------------------------
shall not be assignable or transferable, except by will or by the laws of
descent and distribution, unless otherwise allowed by the Committee.
Notwithstanding the foregoing, the Committee may provide in the terms of an
Award Agreement that the Participant shall have the right to designate a
beneficiary or beneficiaries who shall be entitled to any rights, payments or
other specified under an Award following the Participant's death.
12.2 Employment or Service. Nothing in the Plan, in the grant of any
---------------------
Award or in any Award Agreement shall confer upon any Participant the right to
continue in the capacity in which he is employed by or otherwise serves the
Company or any Subsidiary.
12.3 Securities Laws. No shares of Common Stock will be issued or
---------------
transferred pursuant to an Award unless and until all then applicable
requirements imposed by federal and state securities and other laws, rules and
regulations and by any regulatory agencies having jurisdiction, and by any
stock exchanges upon which the Common Stock may be listed, have been fully
met. As a condition precedent to the issuance of shares pursuant to the grant
of an Award, the Company may require the Participant to take any reasonable
action to meet such requirements. The Committee may impose such conditions on
any shares of Common Stock issuable under the Plan as it may deem advisable,
including, without limitation, restrictions under the Securities Act of 1933,
as amended, under the requirements of any stock exchange upon which such
shares of the same class are then listed, and under any blue sky or other
securities laws applicable to such shares.
12.4 Tax Withholding. The Participant shall be responsible for
----------------
payment of any federal, state and local taxes or similar charges required by
law to be withheld from an Award of Restricted Stock, which shall be paid by
the Participant at the time that taxable income is recognized in respect of
the Award. For purposes hereof, unless otherwise provided in an Award
Agreement, any tax withholding required in respect of an Award held by a
Participant who is subject to Rule 16b-3 at the time taxable income is
recognized may be satisfied by returning to the Company or the Plan Trust the
number of shares of Common Stock necessary to satisfy the tax withholding
liability, valued based on the closing trading price on the trading date
immediately prior to the date of payment of the withholding tax.
12.5 Plan Binding on Successors. The Plan shall be binding upon the
--------------------------
Company, its successors and assigns, and the Participant, his heirs,
administrators, estate, permitted transferees and beneficiaries.
12.6 Construction and Interpretation. Whenever used herein, nouns in
-------------------------------
the singular shall include the plural, and the masculine pronoun shall include
the feminine gender. Headings of Articles and Sections hereof are inserted
for convenience and reference and constitute no part of the Plan.
<PAGE>
12.7 Severability. If any provision of the Plan or any Award
------------
Agreement shall be determined to be illegal or unenforceable by any court of
law in any jurisdiction, the remaining provisions hereof and thereof shall be
severable and enforceable in accordance with their terms, and all provisions
shall remain enforceable in any other jurisdiction.
12.8 Governing Law. The validity and construction of this Plan and
-------------
of the Award Agreements shall be governed by the laws of the State of South
Carolina.
13. EFFECTIVE DATE, AMENDMENT AND TERMINATION
13.1 Effective Date. The Effective Date of the Plan shall be the
--------------
date of adoption of the Plan by the Board.
13.2 Amendment and Termination. The Board may at any time and from
-------------------------
time to time and in any respect, amend or modify or terminate the Plan. No
amendment, modification or termination of the Plan shall in any manner adverse
to a Participant affect any Award theretofore granted without the consent of
the Participant or the permitted transferee of the Award.
<PAGE>
Appendix A
----------
POLICY MANAGEMENT SYSTEMS CORPORATION
STOCK OWNERSHIP GUIDELINES
FOR OFFICERS AND DIRECTORS
1. PREAMBLE
--------
The following sets forth the Stock Ownership Guidelines that have been
established by Policy Management Systems Corporation for its Officers and
Independent Directors. The purpose of the Ownership Guidelines is to further
align the interests of the Company's officers and directors with the
shareholders by providing targeted levels of ownership of the Company's Common
Stock for each such officer and director. The Ownership Guidelines operate
together with, and are made a part of, the Company's Restricted Stock
Ownership Plan (the "Plan") to provide a means of acquiring and retaining such
stock ownership.
2. DEFINITIONS
-----------
The following capitalized terms as used herein shall have the meanings
specified below. All other capitalized terms used herein, unless expressly
defined, shall have the meanings ascribed to them in the Plan.
(a) "Annual Retainer" means the regular annual retainer fee paid to
an Independent Director during a Plan Year.
(b) "Base Salary" means the annual base salary of the Officer as in
effect on the first day of any applicable Plan Year.
(c) "Guideline Period" means the six-year period commencing on
January 1st of the Plan Year following the later of (a) the Effective Date of
the Plan or (b) the initial appointment or election, as applicable, of the
Officer or Independent Director.
(d) "Guideline Stock" means (a) Common Stock registered in the name
of the Participant; (b) Restricted Stock granted to the Participant under the
Plan; (c) Common Stock allocable to the Participant's individual account under
the Company's 401(k) Plan and Employee Stock Purchase Plan; and (d) such other
shares of Common Stock or phantom stock units as may be designated by the
Committee as being beneficially owned by the Participant.
(e) "Holding Period" means the 30-day period preceding the end of any
Plan Year or the Guideline Period, as applicable.
3. CUMULATIVE GUIDELINE TARGETS
------------------------------
A. OFFICERS
--------
Officers of the Company are required to hold shares of Guideline Stock
having an aggregate Fair Market Value equal to the Cumulative Guideline Target
for such Officer as of the end of the Guideline Period, and at the end of each
calendar year thereafter. The Cumulative Guideline Target is determined based
on a specified multiple of the Officer's Base Salary. For purposes hereof,
only Guideline Stock that satisfies the Holding Period shall be considered in
determining whether the Cumulative Guideline Target has been satisfied. The
Cumulative Guideline Targets for Officers holding the following positions with
the Company are as follows:
POSITION CUMULATIVE GUIDELINE TARGET
-------- -----------------------------
Chief Executive Officer 5 X Base Salary
Executive Vice President 2.5 X Base Salary
Senior Vice President 1.5 X Base Salary
Vice President 1 X Base Salary
B. INDEPENDENT DIRECTORS
----------------------
Independent Directors of the Company are required to hold shares of
Guideline Stock having an aggregate Fair Market Value equal to the Cumulative
Guideline Target for such Independent Director as of the end of the Guideline
Period, and at the end of each calendar year thereafter. The Cumulative
Guideline Target is determined by multiplying the Independent Director's
Annual Retainer by five (5). For purposes hereof, only Guideline Stock that
satisfies the Holding Period shall be considered in determining whether the
Cumulative Guideline Target has been satisfied.
4. ANNUAL GUIDELINE TARGETS
--------------------------
Officers and Independent Directors of the Company are required to hold
shares of Guideline Stock having an aggregate Fair Market Value equal to the
Annual Guideline Target for such Officer or Independent Director as of the end
of each Plan Year during the Guideline Period. For purposes hereof, only
Guideline Stock that satisfies the Holding Period shall be considered in
determining whether the Annual Guideline Target has been satisfied. The
Annual Guideline Targets for Officers and Independent Directors are as follows
:
End of Plan Year Annual Guideline Target
------------------- ------------------------
Year of Plan Adoption/Year
of Appointment or Election None
1 None
2 15% of Cumulative Target
3 35% of Cumulative Target
4 55% of Cumulative Target
5 75% of Cumulative Target
6 100% of Cumulative Target
5. EFFECT OF PROMOTIONS
----------------------
An Officer who is promoted from one Officer level to another during the
Guideline Period shall have six full Plan Years beginning with the Plan Year
following the year of the promotion to achieve the Cumulative Guideline Target
applicable to such position. The Annual Guideline Target that shall apply to
any such Officer for a Plan Year shall be the higher of the targets for each
of the current and the prior Officer position, determined by applying the
respective Annual Guideline Targets concurrently from the commencement of the
Guideline Period for each such position. Thus, for example, if an Officer is
promoted from Vice President to Senior Vice President in the third Plan Year
of his original Guideline Period, the Annual Guideline Target applicable to
such Officer at the end of the second Plan Year of his new position shall be
the greater of (i) 15% (yr. 1 guideline) of 1.5 X Base Salary (new target) or
(ii) 75% (yr. 3 guideline) of 1 X Base Salary (original target).
6. AMENDMENTS AND ADJUSTMENTS
----------------------------
The Board and the Committee reserve the right to amend or modify the
Ownership Guidelines set forth herein at any time and in whatever manner they
deem appropriate, without requirement of notice to or consent from any
affected Officer or Independent Director. The Committee has the discretionary
authority to make adjustments to the Ownership Guidelines as applied to
individual Officers or Independent Directors for purposes of the Plan, as more
fully set forth in Section 4 of the Plan.
POLICY MANAGEMENT SYSTEMS CORPORATION
RESTRICTED STOCK AWARD AGREEMENT
--------------------------------
Award Agreement, dated as of August 11, 1998 (the "Date of Grant")
between POLICY MANAGEMENT SYSTEMS CORPORATION, a South Carolina corporation
(the "Company"), and (the "Participant"). This Award Agreement is pursuant
to the terms of the Company's Restricted Stock Ownership Plan (the "Plan").
The applicable terms of the Plan are incorporated herein by reference,
including the definition of terms contained in the Plan.
Section 1. Restricted Stock Award. The Company grants to the
--------- ----------------------
Participant, on the terms and conditions hereinafter set forth, a Restricted
Stock award with respect to 306 SHARES of the Common Stock of the Company (the
"Restricted Stock").
Section 2. Vesting of Restricted Stock. Subject to Sections 3
--------- ---------------------------
and 4 hereof, the Restricted Stock shall become vested and nonforfeitable in
five equal annual installments based on the continued service of the
Participant on the Board in accordance with the following vesting schedule:
Vesting Date Number of Shares
------------ ----------------
1. January 1, 1999 61
2. January 1, 2000 61
3. January 1, 2001 61
4. January 1, 2002 61
5. January 1, 2003 62
Section 3. Termination of Service. If the Participant's service
---------- ----------------------
on the Board is terminated by reason of Retirement, Disability or Death, all
unvested shares of Restricted Stock shall become immediately vested and
nonforfeitable. If the Participant's service on the Board is terminated by
the Company without Cause prior to any applicable vesting date, two-thirds
(2/3) of the remaining unvested shares of Restricted Stock shall become
immediately vested and nonforfeitable, and one-third (1/3) of the remaining
unvested shares shall be forfeited to the Company (in each case rounded upward
or downward to the nearest whole share, as applicable). If the Participant is
nominated but is not reelected as a member of the Board by the shareholders of
the Company, the restrictions imposed on any unvested portion of the
Restricted stock shall immediately lapse. If the Participant's service on the
Board is terminated for any reason other than as provided above in this
Section 3 (including, without limitation, voluntary termination by the
Participant or termination by the Company for Cause) prior to any applicable
vesting date, the Participant shall forfeit his interest in all shares of
Restricted Stock that have not become vested as of the date of termination.
Any shares of Restricted Stock that are forfeited by the Participant hereunder
shall be returned and transferred to the Company or the Plan Trust, as
determined by the Company, and the Participant shall cease for all purposes to
be a shareholder of such shares as of the date of termination of service.
<PAGE>
Section 4. Change of Control. All shares of Restricted Stock
---------- -----------------
shall become fully and immediately vested and nonforfeitable upon the
occurrence of a Change of Control of the Company prior to any scheduled
vesting date as provided in Section 2 hereof, provided that the Participant
remains an Independent Director of the Company on the date of the Change in
Control.
Section 5. Rights as a Shareholder. Subject to the otherwise
---------- -----------------------
applicable provisions of the Plan and this Award Agreement, the Participant
will have all rights of a shareholder with respect to shares of Restricted
Stock granted to the Participant hereunder, including the right to vote the
shares and receive all dividends and other distributions paid or made with
respect thereto.
Section 6. Restrictions on Transfer. Neither this Award nor any
--------- ------------------------
shares of the Restricted Stock covered hereby may be sold, assigned,
transferred, encumbered, hypothecated or pledged by the Participant, otherwise
than to the Company, unless as of the date of any such sale, assignment,
transfer, encumbrance, hypothecation or pledge, such shares of Restricted
Stock to be thus disposed of have become vested in accordance with this Award
Agreement. The certificate or certificates representing shares delivered
pursuant to the Award shall bear a legend referring to the nontransferability
or assignability of such shares pursuant to this Section, and a stop-transfer
order against such certificate or certificates will be placed by the Company
with its transfer agents and registrars. At the discretion of the Committee,
in lieu of issuing a stock certificate to the Participant, the Company or its
designated agent may hold the shares of Restricted Stock in escrow during the
period such shares remain subject to the vesting restrictions and other
restrictions provided hereunder.
Section 7. Award Subject to Plan. This Award and the Restricted
--------- ---------------------
Stock acquired hereunder are subject to the Plan, the terms and provisions of
which, as it may be amended from time to time, are hereby incorporated herein
by reference. In the event of a conflict between any term or provision
contained herein and a term or provision of the Plan will govern and prevail.
Section 8. Section 83(b) Election. The Participant shall
---------- -----------------------
promptly (and not later than 30 days of the date hereof) notify the Company if
the Participant makes an election under section 83(b) of the Internal Revenue
Code.
Section 9. Investment Representation. Upon acquisition of
---------- -------------------------
Restricted Stock under the Plan at a time when there is not in effect a
registration statement under the Securities Act of 1933 relating to the shares
of Common Stock, the Participant hereby represents and warrants, and by virtue
of such acquisition shall be deemed to represent and warrant, to the Company
that the shares of Restricted Stock shall be acquired for investment and not
with a view to the distribution thereof, and not with any present intention of
distributing the same, and the Participant shall provide the Company with such
further representations and warranties as the Company may require in order to
ensure compliance with applicable federal and state securities, blue sky and
other laws. No shares of Restricted Stock shall be acquired unless and until
the Company and/or the Participant shall have complied with all applicable
federal or state registration, listing and/or qualification requirements and
all other requirements of law or of any regulatory agencies having
jurisdiction, unless the Committee has received evidence satisfactory to it
that the Participant may acquire such shares pursuant to an exemption from
registration under the applicable securities laws. Any determination in this
connection by the Committee shall be final, binding, and conclusive. The
Company reserves
<PAGE>
the right to legend any certificate for shares of Common Stock, conditioning
sales of such shares upon compliance with applicable federal and state
securities laws and regulations.
Section 10. Changes in Common Stock. Any right of the
----------- --------------------------
Participant or the Company hereunder with respect to the Restricted Stock
shall also apply to any other shares of stock of the Company which such
Restricted Stock has been exchanged or converted into, or which were issued in
respect thereof, pursuant to any recapitalization or other event referred to
in Section 3.2 of the Plan, as determined by the Committee in accordance with
the Plan.
Section 11. No Right of Service. Nothing in this Award
----------- ----------------------
Agreement shall confer upon the Participant any right to continue as an
Independent Director of the Company or to interfere in any way with the right
of the Company or the shareholders of the Company to terminate the
Participant's service on the Board at any time.
Section 12. Notices. Any notice hereunder by the Participant
----------- -------
shall be given to the Company in writing and such notice shall be deemed duly
given only upon receipt thereof at the Company's office at One PMSC Center,
Blythewood, South Carolina, 29016, or at such other address as the Company may
designate by notice to the President and General Counsel. Any notice
hereunder by the Company shall be given to the Participant in writing and such
notice shall be deemed duly given only upon receipt thereof at such address as
the Participant may have on file with the Company.
Section 13. Construction. The Committee shall have the
----------- ------------
discretionary authority for the interpretation and construction of this Award
Agreement, as and in the manner set forth in Section 4.2 of the Plan.
Section 14. Governing Law. This Award Agreement shall be
----------- --------------
construed and enforced in accordance with the laws of the State of South
Carolina, without giving effect to the choice of law principles thereof.
POLICY MANAGEMENT SYSTEMS CORPORATION
By: ____________________
Name: Stephen G. Morrison
Title: Executive Vice President, Secretary &
General Counsel
PARTICIPANT
Name:
<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 NINE MONTHS ENDED
SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIREY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 15896
<SECURITIES> 0
<RECEIVABLES> 132717
<ALLOWANCES> 2095
<INVENTORY> 0
<CURRENT-ASSETS> 192095
<PP&E> 244041
<DEPRECIATION> 121939
<TOTAL-ASSETS> 662278
<CURRENT-LIABILITIES> 77429
<BONDS> 0
0
0
<COMMON> 361
<OTHER-SE> 409003
<TOTAL-LIABILITY-AND-EQUITY> 662278
<SALES> 0
<TOTAL-REVENUES> 436613
<CGS> 0
<TOTAL-COSTS> 359644
<OTHER-EXPENSES> 11317
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2474
<INCOME-PRETAX> 64747
<INCOME-TAX> 24727
<INCOME-CONTINUING> 40020
<DISCONTINUED> (64)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39956
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.01
</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 NINE MONTHS ENDED
SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIREY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 18639
<SECURITIES> 3006
<RECEIVABLES> 140172
<ALLOWANCES> 1057
<INVENTORY> 0
<CURRENT-ASSETS> 194164
<PP&E> 248732
<DEPRECIATION> 134375
<TOTAL-ASSETS> 594173
<CURRENT-LIABILITIES> 73991
<BONDS> 0
0
0
<COMMON> 183
<OTHER-SE> 394937
<TOTAL-LIABILITY-AND-EQUITY> 594173
<SALES> 0
<TOTAL-REVENUES> 370866
<CGS> 0
<TOTAL-COSTS> 310351
<OTHER-EXPENSES> 7360
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3951
<INCOME-PRETAX> 51310
<INCOME-TAX> 19135
<INCOME-CONTINUING> 32175
<DISCONTINUED> 1548
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33723
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.90
</TABLE>
