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 JUNE 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.
36,735,065 Common shares, $.01 par value, as of August 7, 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.
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POLICY MANAGEMENT SYSTEMS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
<S> <C>
Consolidated Statements of Income for the Three and
Six Months Ended June 30, 1998 and 1997 . . . . . . 3
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income for the Six Months
Ended June 30, 1998 and 1997. . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 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 . . . . . . . . . . . . . 24
Item 4. Submission of Matters to a Vote of
Security Holders. . . . . . . . . . . . . . . . . 24
Item 5. Other Information . . . . . . . . . . . . . 24
Item 6. Exhibits and Reports on Form 8-K. . . . . . 24
Signatures. . . . . . . . . . . . . . . . . . . . . 25
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PART I
FINANCIAL INFORMATION
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
(Unaudited)
------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
REVENUES
Licensing . . . . . . . . . . . . . . . . . . . $ 29,503 $ 32,322 $ 58,240 $ 58,552
Services. . . . . . . . . . . . . . . . . . . . 115,386 91,506 227,070 180,359
--------- --------- --------- ---------
144,889 123,828 285,310 238,911
--------- --------- --------- ---------
OPERATING EXPENSES
Cost of revenues
Employee compensation & benefits. . . . . . . 64,781 51,131 128,089 98,460
Computer and communications expenses. . . . . 7,932 8,240 15,745 16,074
Depreciation and amortization of property,
equipment and capitalized software costs . . 15,889 14,309 31,553 28,225
Other costs & expenses. . . . . . . . . . . . 6,572 9,326 12,809 14,995
Selling, general and administrative expenses. . 24,851 21,742 48,979 43,831
Amortization of goodwill and other intangibles. 2,489 2,437 4,912 4,909
--------- --------- --------- ---------
122,514 107,185 242,087 206,494
--------- --------- --------- ---------
OPERATING INCOME . . . . . . . . . . . . . . . . 22,375 16,643 43,223 32,417
Equity in earnings of unconsolidated affiliates. 233 320 438 690
Minority interest. . . . . . . . . . . . . . . . (30) - (30) -
Other Income and Expenses
Investment income. . . . . . . . . . . . . . . 184 344 686 771
Interest expense and other charges . . . . . . (554) (1,356) (1,481) (2,573)
--------- --------- --------- ---------
(370) (1,012) (795) (1,802)
--------- --------- --------- ---------
Income from continuing operations
before income taxes. . . . . . . . . . . . . . 22,208 15,951 42,836 31,305
Income taxes . . . . . . . . . . . . . . . . . . 8,226 5,951 15,987 11,681
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS. . . . . . . . 13,982 10,000 26,849 19,624
DISCONTINUED OPERATIONS:
Income from operations of discontinued
operations less applicable income taxes
of $37, $481, $252 and $820, respectively. . 67 694 389 1,162
Loss on disposal of discontinued operations
less applicable income taxes of $2,439 . . . (453) - (453) -
--------- --------- --------- ---------
(386) 694 (64) 1,162
--------- --------- --------- ---------
NET INCOME . . . . . . . . . . . . . . . . . . . $ 13,596 $ 10,694 $ 26,785 $ 20,786
========= ========= ========= =========
BASIC EARNINGS PER SHARE:
Income from continuing operations. . . . . . . $ 0.38 $ 0.27 $ 0.73 $ 0.54
Income (loss) from discontinued operations . . (0.01) 0.02 - 0.03
--------- --------- --------- ---------
$ 0.37 $ 0.29 $ 0.73 $ 0.57
========= ========= ========= =========
DILUTED EARNINGS PER SHARE:
Income from continuing operations. . . . . . . $ 0.35 $ 0.27 $ 0.68 $ 0.53
Income (loss) from discontinued operations . . (0.01) 0.02 - 0.03
--------- --------- --------- ---------
$ 0.34 $ 0.29 $ 0.68 $ 0.56
========= ========= ========= =========
Weighted average common shares . . . . . . . . . 36,763 36,373 36,726 36,366
Weighted average common shares assuming dilution 39,675 37,068 39,434 36,934
<FN>
See accompanying notes
</TABLE>
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<TABLE>
<CAPTION>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
June 30, December 31,
1998 1997
-------- --------
(In Thousands, Except Share Data)
<S> <C> <C>
Assets
Current assets
Cash and equivalents. . . . . . . . . . . . . . . . . . . . $ 25,001 $ 32,179
Marketable securities . . . . . . . . . . . . . . . . . . . 20 3,280
Receivables, net of allowance for uncollectible
amounts of $2,141 ($2,628 at 1997) . . . . . . . . . . . . 113,791 128,789
Income tax receivable . . . . . . . . . . . . . . . . . . . 670 1,098
Deferred income taxes . . . . . . . . . . . . . . . . . . . 9,438 3,628
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,054 16,835
--------- ---------
Total current assets. . . . . . . . . . . . . . . . . . . 171,974 185,809
Property and equipment, at cost less accumulated
depreciation and amortization of $140,001
($139,522 at 1997). . . . . . . . . . . . . . . . . . . . . 123,872 116,433
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . 2,320 3,271
Income tax receivable. . . . . . . . . . . . . . . . . . . . 4,041 4,041
Goodwill and other intangibles, net. . . . . . . . . . . . . 61,525 69,125
Capitalized software costs, net. . . . . . . . . . . . . . . 212,566 204,118
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 21,773 21,996
Investments. . . . . . . . . . . . . . . . . . . . . . . . . 8,612 11,066
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,632 2,547
--------- ---------
Total assets. . . . . . . . . . . . . . . . . . . . . . $614,315 $618,406
========= =========
Liabilities
Current liabilities
Accounts payable and accrued expenses . . . . . . . . . . . $ 49,510 $ 57,345
Accrued restructuring charges . . . . . . . . . . . . . . . 303 145
Accrued contract termination costs. . . . . . . . . . . . . 472 830
Current portion of long-term debt . . . . . . . . . . . . . 9,191 1,191
Income taxes payable. . . . . . . . . . . . . . . . . . . . 17,492 7,499
Unearned revenues . . . . . . . . . . . . . . . . . . . . . 13,964 18,806
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 396 397
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . 91,328 86,213
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . 443 37,714
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 88,292 80,496
Accrued restructuring charges. . . . . . . . . . . . . . . . 1,236 1,366
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,894 2,121
--------- ---------
Total liabilities. . . . . . . . . . . . . . . . . . . . 186,193 207,910
--------- ---------
Minority interest. . . . . . . . . . . . . . . . . . . . . . 455 -
Commitments and contingencies (Note 2)
Stockholders' Equity
Special stock, $.01 par value, 5,000,000 shares authorized . - -
Common stock, $.01 par value, 75,000,000 shares authorized,
36,768,534 shares issued and outstanding
(18,339,304 at December 31, 1997) . . . . . . . . . . . . . 368 183
Additional paid-in capital . . . . . . . . . . . . . . . . . 104,276 112,090
Retained earnings. . . . . . . . . . . . . . . . . . . . . . 332,968 306,367
Accumulated other comprehensive income . . . . . . . . . . . (9,945) (8,144)
--------- ---------
Total stockholders' equity . . . . . . . . . . . . . . . 427,667 410,496
--------- ---------
Total liabilities and stockholders' equity. . . . . . . $614,315 $618,406
========= =========
<FN>
See accompanying notes
</TABLE>
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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 . . . . . . . . . - - 26,785 - 26,785
Other comprehensive income,
net of tax:
Foreign currency
translation adjustments . - - - (1,793) (1,793)
Unrealized loss on
marketable securities . . - - - (8) (8)
---------
Total comprehensive income 24,984
---------
Stock dividend. . . . . . . . 184 - (184) - -
Stock options exercised
(344,239 shares). . . . . . 4 18,220 - - 18,224
Repurchase of 341,700 shares
of common stock . . . . . . (3) (26,034) - - (26,037)
----- --------- --------- -------- ---------
BALANCE, JUNE 30, 1998. . . . $368 $104,276 $332,968 $(9,945) $427,667
===== ========= ========= ======== =========
<FN>
See accompanying notes
(1) Comprehensive income for the three months ended June 30, 1998 and 1997 was
$12,103 and $8,726, respectively.
Comprehensive income for the six months ended June 30, 1997 was $16,092.
</TABLE>
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<TABLE>
<CAPTION>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
1998 1997
------- -------
(In Thousands)
Operating Activities
<S> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . $ 26,785 $ 20,786
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization. . . . . . . . . 39,595 35,063
Deferred income taxes. . . . . . . . . . . . . 1,542 4,999
Provision for uncollectible accounts . . . . . 15 1,516
Minority interest. . . . . . . . . . . . . . . 30 -
Gain on disposal of discontinued operations. . (1,986) -
Impairment charges . . . . . . . . . . . . . . - 444
Changes in assets and liabilities:
Accrued restructuring and lease
termination costs . . . . . . . . . . . . . . 29 (2,207)
Receivables. . . . . . . . . . . . . . . . . . 9,178 (16,236)
Income taxes receivable. . . . . . . . . . . . 428 18
Accounts payable and accrued expenses. . . . . (9,589) (9,358)
Income taxes payable . . . . . . . . . . . . . 9,993 1,981
Other, net . . . . . . . . . . . . . . . . . . . (17,389) 17
--------- ---------
Cash provided by operations . . . . . . . . 58,631 37,023
--------- ---------
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 -
Acquisition of property and equipment. . . . . . (27,893) (16,428)
Capitalized internal software development
costs . . . . . . . . . . . . . . . . . . . . . (28,431) (29,623)
Business acquisition . . . . . . . . . . . . . . (2,688) -
Investment by minority interest. . . . . . . . . 425 -
Proceeds from disposal of property and
equipment . . . . . . . . . . . . . . . . . . . 1,735 805
--------- ---------
Cash used by investing activities . . . . . (26,800) (44,996)
--------- ---------
Financing Activities
Payments on long-term debt . . . . . . . . . . . (41,771) (77,427)
Proceeds from borrowing under credit facility. . 12,500 72,138
Issuance of common stock under stock
option plans. . . . . . . . . . . . . . . . . . 18,224 691
Repurchase of common stock . . . . . . . . . . . (26,037) -
--------- ---------
Cash used by financing activities . . . . . (37,084) (4,598)
--------- ---------
Effect of exchange rate changes on cash . . . . . (1,925) 76
Net decrease in cash and equivalents. . . . . . . (7,178) (12,495)
Cash and equivalents at beginning of period . . . 32,179 22,121
--------- ---------
Cash and equivalents at end of period . . . . . . $ 25,001 $ 9,626
========= =========
Supplemental Information
Interest paid. . . . . . . . . . . . . . . . . . $ 1,533 $ 2,212
Income taxes paid. . . . . . . . . . . . . . . . 2,725 3,790
<FN>
See accompanying notes
</TABLE>
<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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):
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<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1998 1997 1998 1997
----- ------ ----- ------
Weighted Average Shares
- -----------------------
<S> <C> <C> <C> <C>
Basic EPS. . . . . . . . . . . 36,763 36,373 36,726 36,366
Effect of common stock options 2,912 695 2,708 568
------ ------ ------ ------
Diluted EPS. . . . . . . . . . 39,675 37,068 39,434 36,934
====== ====== ====== ======
</TABLE>
Options to purchase 750,000 shares of common stock at $40.95 per share
were outstanding but were not included in the computation of diluted EPS for
1998 because the options' exercise price was greater than the average market
price of the Company's common stock for the period ending June 30, 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 any of the balance sheet periods presented.
OTHER MATTERS
Certain prior period amounts have been reclassified to conform to current
period presentation.
NOTE 2. 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
<PAGE>
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.
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 3. SEGMENT INFORMATION
The Company's operating segments are the five revenue-producing
components of the Company for which separate financial information is produced
for internal decision making and planning purposes. The segments are as
follows:
1. Property and casualty enterprise software and services (generally referred
to as the "domestic property and casualty business"). This segment provides
software products, product support, professional services and outsourcing
primarily to the US property and casualty insurance market.
2. Life and financial solutions enterprise software and services (generally
referred to as the "domestic life and financial solutions business"). This
segment provides software products, product support, professional services and
outsourcing primarily to the US life insurance and related financial services
markets.
3. International. This segment provides software products, product support,
professional services, outsourcing and information services to the property
and casualty and life insurance markets primarily in Canada, Europe, Asia and
Australia.
4. Property and casualty information services. This segment provided
information services, principally motor vehicle records and claims histories,
to US property and casualty insurers. This segment was sold in August 1997
and is presented as a discontinued operation.
5. Life information services. This segment 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 six months ended
June 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
(In thousands)
REVENUES FROM EXTERNAL CUSTOMERS
<S> <C> <C> <C> <C>
Enterprise software and services
Property and casualty . . . . . . . . . . $ 66,618 $ 55,559 $134,569 $111,833
Life and financial solutions. . . . . . . 33,336 26,369 63,761 46,524
--------- --------- --------- ---------
Total US revenues . . . . . . . . . . . 99,954 81,928 198,330 158,357
International . . . . . . . . . . . . . . 44,935 41,900 86,980 80,554
--------- --------- --------- ---------
Total revenues from
continuing operations. . . . . . . . $144,889 $123,828 $285,310 $238,911
========= ========= ========= =========
Discontinued Operations
Information Services
Property and casualty. . . . . . . . . . $ - $ 24,172 $ - $ 48,241
Life . . . . . . . . . . . . . . . . . . 4,843 16,800 11,968 32,904
INCOME (EXPENSE) FROM CONTINUING OPERATIONS
Enterprise software and services
Property and casualty . . . . . . . . . . $ 16,974 $ 13,277 $ 34,434 $ 28,794
Life and financial solutions. . . . . . . 7,612 7,259 14,491 11,209
Corporate and US administrative . . . . . (7,187) (7,207) (13,678) (11,938)
--------- --------- --------- ---------
Total US operating income . . . . . . . 17,399 13,329 35,247 28,065
--------- --------- --------- ---------
International . . . . . . . . . . . . . . 7,074 5,003 12,036 7,537
International administrative. . . . . . . (2,098) (1,689) (4,060) (3,185)
--------- --------- --------- ---------
Total international . . . . . . . . . . 4,976 3,314 7,976 4,352
--------- --------- --------- ---------
Operating income. . . . . . . . . . . 22,375 16,643 43,223 32,417
Equity in earnings of
unconsolidated affiliates . . . . . . . . 233 320 438 690
Minority interest . . . . . . . . . . . . . (30) - (30) -
Other income and expenses . . . . . . . . . (370) (1,012) (795) (1,802)
Income taxes. . . . . . . . . . . . . . . . 8,226 5,951 15,987 11,681
--------- --------- --------- ---------
Income from continuing operations . . . . $ 13,982 $ 10,000 $ 26,849 $ 19,624
========= ========= ========= =========
DISCONTINUED OPERATIONS
Information Services
Property and casualty . . . . . . . . . . $ (1,018) $ 152 $ (1,018) $ 426
Life. . . . . . . . . . . . . . . . . . . 3,112 1,023 3,672 1,556
Other income and expenses . . . . . . . . (4) - (27) -
Income taxes. . . . . . . . . . . . . . . 2,476 481 2,691 820
--------- --------- --------- ---------
Discontinued operations, net . . . . . . $ (386) $ 694 $ (64) $ 1,162
========= ========= ========= =========
</TABLE>
<PAGE>
NOTE 4. DISCONTINUED OPERATIONS
The Company sold its life information services segment in May 1998, net
of selling expenses, for $23.8 million, 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 3 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 5. 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 Six Three Six
Months Ended Months Ended Months Months
June 30, June 30, Ended Ended
------------ ------------
1998 1997 1998 1997 June 30
----- ----- ----- ----- -----------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Licensing . . . . . . . . . . . . . 20.4% 26.1% 20.4% 24.5% (8.7)% (0.5)%
Services. . . . . . . . . . . . . . 79.6 73.9 79.6 75.5 26.1 25.9
------ ------ ------ ------
100.0 100.0 100.0 100.0 17.0 19.4
------ ------ ------ ------
Operating expenses
Cost of revenues
Employee compensation and benefits 44.7 41.2 44.9 41.2 26.7 30.1
Computer & communication expenses. 5.5 6.7 5.5 6.7 (3.7) (2.0)
Depreciation & amortization
of property, equipment &
capitalized software costs. . . . 11.0 11.6 11.1 11.8 11.0 11.8
Other costs & expenses . . . . . . 4.5 7.5 4.5 6.3 (29.5) (14.6)
Selling, general &
administrative expenses . . . . . 17.2 17.6 17.2 18.3 14.3 11.7
Amortization of goodwill and
other intangibles . . . . . . . . 1.7 2.0 1.7 2.1 2.1 0.1
------ ------ ------ ------
84.6 86.6 84.9 86.4 14.3 17.2
------ ------ ------ ------
Operating income . . . . . . . . . . 15.4 13.4 15.1 13.6 34.4 33.3
Equity in earnings of unconsolidated
affiliates. . . . . . . . . . . . 0.2 0.3 0.2 0.3 (27.2) (36.5)
Other income and expenses. . . . . . (0.2) (0.8) (0.3) (0.8) (63.4) (55.9)
------ ------ ------ ------
Income from continuing operations
before income taxes. . . . . . . . 15.4 12.9 15.0 13.1 39.2 36.8
Income taxes . . . . . . . . . . . . 5.7 5.0 5.6 5.0 38.2 36.9
------ ------ ------ ------
Income from continuing operations. . 9.7 7.9 9.4 8.1 39.8 36.8
Discontinued operations, net . . . . (0.3) 0.7 - 0.6 (155.6) (105.5)
------ ------ ------ ------
Net income . . . . . . . . . . . . . 9.4% 8.6% 9.4% 8.7% 27.1% 28.9%
====== ====== ====== ======
</TABLE>
<PAGE>
THREE MONTH COMPARISON
REVENUES
<TABLE>
<CAPTION>
Three Months
Ended June 30,
--------------
Licensing 1998 1997 Change
----- ----- ------
(Dollars in Millions)
<S> <C> <C> <C>
Initial charges. . . . . . . $13.0 $16.6 (21.6)%
Monthly charges. . . . . . . 16.5 15.7 4.8
------ ------
$29.5 $32.3 (8.7)%
====== ======
Percentage of total revenues 20.4% 26.1%
------ ------
</TABLE>
Initial license revenues decreased $3.6 million for the second quarter of
1998 compared to the second quarter of 1997, with the following increases or
decreases by business segment: domestic property and casualty down 6.0% ($0.2
million); life insurance and financial solutions down 48.8% ($3.6 million);
and international up 3.7% ($0.2 million).
Initial license charges for the second quarter of 1998 include
right-to-use licenses of $2.1 million. The right-to-use licenses represent
acquisitions by certain customers of perpetual rights. This compares to $0.9
million in right-to-use licenses for the second quarter of 1997. Initial
license charges also 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 second quarter of 1997 with the
purchaser of the discontinued property & casualty information services
segment.
Monthly license charges increased $0.8 million for the second quarter of
1998 compared to the second quarter of 1997 with the following increases or
decreases by business segment: domestic property and casualty down 2.5% ($0.2
million); life insurance and financial solutions up 21.5% ($0.6 million); and
international up 10.9% ($0.4 million).
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
------------ ------------------------- ------------
2nd 1st 4th 3rd 2nd 1st 4th 3rd
------------ ------------------------- ------------
(Dollars in Millions)
Initial license revenues $13.0 $12.6 $25.1 $16.9 $16.6 $11.3 $19.4 $10.0
% of total revenues 9.0% 9.0% 17.0% 12.8% 13.4% 9.8% 15.5% 9.3%
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended June 30,
--------------
Services 1998 1997 Change
----- ----- ------
(Dollars In Millions)
<S> <C> <C> <C>
Professional and outsourcing $114.1 $90.2 26.5%
Information. . . . . . . . . 0.2 0.2 16.5
Other. . . . . . . . . . . . 1.1 1.1 (3.2)
------- ------
$115.4 $91.5 26.1%
======= ======
Percentage of total revenues 79.6% 73.9%
------- ------
</TABLE>
Professional and outsourcing services revenues increased $23.9 million
for the second quarter of 1998 compared to the second quarter of 1997, with
the following increases by business segment: domestic property and casualty
up 28.4% ($11.9 million); life insurance and financial solutions up 61.3%
($9.9 million); and international up 6.5% ($2.1 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 26.7% for the second quarter
of 1998 compared to the second quarter of 1997, principally the result of
increased salaries and related costs associated with the growth in
professional services staffing. Compensation and benefits increased 22.4%
($3.5 million) internationally, while domestic increased 28.6% ($10.2
million).
Computer and communications expenses remained relatively unchanged.
Depreciation and amortization of property, equipment and capitalized
software costs increased 11.0% for the second quarter of 1998 compared to the
second quarter of 1997, principally due to higher amortization expense
resulting from the recent release of the Company's S3+ property and casualty
insurance client/server software systems. In addition, depreciation expense
increased due to the Company's increased investment in its information
technology equipment.
Other operating costs and expenses decreased 29.5% for the second quarter
of 1998 compared to the second quarter of 1997, principally due to lower
consultant, contract loss and bad debt expenses, partially offset by decreased
amounts of software development costs capitalized.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 14.3% for the
second quarter of 1998 compared to the second quarter of 1997, principally due
to increased bonus, commission, and other salary costs, partially offset by a
decrease in third party commissions.
<PAGE>
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles remained relatively
unchanged.
OPERATING INCOME
1998 second quarter operating income increased 34.4% compared to 1997
second quarter operating income. Property and casualty insurance operating
income increased 27.8%, domestic life insurance operating income increased
4.9% and international operating income increased 41.4%. 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 respective revenue.
OTHER INCOME AND EXPENSE
Interest expense decreased 59.1% for the second quarter of 1998 compared
to the second 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 second quarter of
1998 was 5.9%.
INCOME TAXES
The effective income tax rate (income taxes expressed as a percentage of
pre-tax income) was 37.0% and 37.3% for the second quarters of 1998 and 1997,
respectively. The effective rate for the second quarter 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 second quarter of
1998 compared to the second quarter of 1997, principally due to (i) an
additional loss of $0.6 million recognized during the second quarter of 1998
on the sale of the property & casualty information services segment; (ii)
partial quarter operating results in the second quarter of 1998 compared to
full quarter operating results in the second quarter of 1997 for the life
information services segment; and (iii) no operating results in the second
quarter of 1998 compared to full quarter operating results in the second
quarter of 1997 for the property & casualty information services segment.
<PAGE>
SIX MONTH COMPARISON
REVENUES
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------
Licensing 1998 1997 Change
----- ----- ------
(Dollars in Millions)
<S> <C> <C> <C>
Initial charges. . . . . . . $25.6 $27.9 (8.1)%
Monthly charges. . . . . . . 32.6 30.7 6.4
------ ------
$58.2 $58.6 (0.5)%
====== ======
Percentage of total revenues 20.4% 24.5%
------ ------
</TABLE>
Initial license revenues decreased $2.3 million for the first six months
of 1998 compared to the same period in 1997, with the following increases or
decreases by business segment: domestic property and casualty up 32.3% ($2.1
million); life insurance and financial solutions down 39.2% ($4.5 million);
and international up 1.2% ($0.1 million).
Initial license charges for the first six months of 1998 include
right-to-use licenses of $7.0 million. The right-to-use licenses represent
acquisitions by certain customers of perpetual rights. This compares to $1.9
million in right-to-use licenses for the same period of 1997. Initial license
charges also 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 second quarter of 1997 with the purchaser of
the discontinued property & casualty information services segment.
Monthly license charges increased $1.9 million for the first six months
of 1998 compared to the same period in 1997, with the following increases or
decreases by business segment: domestic property and casualty down 0.3% ($0.1
million); life insurance and financial solutions up 22.6% ($1.2 million); and
international up 11.0% ($0.8 million).
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------
Services 1998 1997 Change
----- ----- ------
(Dollars In Millions)
<S> <C> <C> <C>
Professional and outsourcing $224.9 $177.4 26.8%
Information. . . . . . . . . 0.3 0.3 (5.3)
Other. . . . . . . . . . . . 1.9 2.7 (29.6)
------- -------
$227.1 $180.4 25.9%
======= =======
Percentage of total revenues 79.6% 75.5%
------- -------
</TABLE>
<PAGE>
Professional and outsourcing services revenues increased $47.5 million
for the first six months of 1998 compared to the same period in 1997, with the
following increases by business segment: domestic property and casualty up
25.5% ($21.7 million); life insurance and financial solutions up 68.9% ($20.4
million); and international up 8.6% ($5.4 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 30.1% for the first six
months of 1998 compared to the same period in 1997, principally the result of
increased salaries and related costs associated with the growth in
professional services staffing. Compensation and benefits increased 22.6%
($6.9 million) internationally, while domestic increased 33.5% ($22.7
million).
Computer and communications expenses remained relatively unchanged.
Depreciation and amortization of property, equipment and capitalized
software costs increased 11.8% for the first six months of 1998 compared to
the same period in 1997, principally due to higher amortization expense
resulting from the recent release of the Company's S3+ property and casualty
insurance client/server software systems. In addition, depreciation expense
increased due to the Company's increased investment in its information
technology equipment.
Other operating costs and expenses decreased 14.6% for the first six
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 software development costs
capitalized.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 11.7% for the
first six 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 remained relatively
unchanged.
OPERATING INCOME
1998 six month operating income increased 33.3% compared with 1997 six
month operating income. Property and casualty insurance operating income
increased 19.6%, domestic life insurance operating income increased 29.3% and
international operating income increased 59.7%. 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
respective revenue.
<PAGE>
OTHER INCOME AND EXPENSE
Interest expense decreased 42.4% for the first six 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
six months of 1998 was 5.9%.
INCOME TAXES
The effective income tax rate (income taxes expressed as a percentage of
pre-tax income) was 37.3% and 37.3% for the six months ended June 30, 1998 and
1997, respectively. The effective rate for the first six 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 operations of the discontinued operations increased for the
first six 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 of the property & casualty information services segment;
(ii) partial quarter operating results in the second quarter of 1998 compared
to full quarter operating results in the second quarter of 1997 for the life
information services segment; and (iii) no operating results in the second
quarter of 1998 compared to full quarter operating results in the second
quarter 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. In March 1998, the Company announced an agreement in
principle to form a strategic alliance for systems outsourcing with Integrated
Business Solutions, a unit of Lockheed Martin Corporation ("Lockheed Martin").
A Data Processing Services Agreement was completed in June 1998 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 $10 million, to be paid in January 1999.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
- ---------------------------------------------------
(Dollars in Millions)
<S> <C> <C>
Cash and equivalents, marketable
securities, and investments. . $ 33.6 $ 46.5
Current assets . . . . . . . . . 172.0 185.8
Current liabilities. . . . . . . 91.3 86.2
Working capital. . . . . . . . . 80.7 99.6
Long-term debt . . . . . . . . . 0.4 37.7
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
- -----------------------------------------------------
(Dollars in Millions)
<S> <C> <C>
Cash provided by operations. . . . $ 58.6 $ 37.0
Cash used for investing activities (26.8) (45.0)
Cash used for financing activities (37.1) (4.6)
</TABLE>
The Company's current ratio (current assets divided by current
liabilities) stood at 1.9 at June 30, 1998, which management believes is
sufficient when combined with the available credit facility to provide for
day-to-day operating needs and the flexibility to take advantage of investment
opportunities. The Company has available, at June 30, 1998, all of its $200
million credit facility. Also, the Company has available (net of amounts
outstanding at June 30, 1998) $7 million under its $15 million uncommitted
operating line of credit with which it may choose to fund temporary operating
cash needs.
During the six months ended June 30, 1998 the Company capitalized
software development costs of $28.4 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 data processing and communications equipment, support
software, buildings, building improvements and office furniture, fixtures and
equipment and costs relating to the internal development of software systems.
The Company has historically used the cash generated from operations for
development and acquisition of new products, acquisition of businesses and
repurchase of the Company's stock. The Company anticipates that, subject to
market conditions, it will continue to use its cash for all of these purposes
in the future and that projected cash from operations will be able to meet
presently anticipated needs; however, the Company may also consider incurring
<PAGE>
debt, as discussed above, as needed to accomplish specific objectives in these
areas and for other general corporate purposes.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's operating results and financial condition can be impacted
by a number of factors, including, but not limited to, the following, any of
which could cause actual results to vary materially from current and
historical results or the Company's anticipated future results:
- - Currently, the Company's business is focused principally within the
global property and casualty and life insurance and related financial services
industries;
- - There is increasing competition for the Company's products and services;
- - The market for the Company's products and services is characterized by
rapid changes in technology;
- - Contracts with governmental agencies involve a variety of special risks,
including the risk of early contract termination by the governmental agency
and changes associated with newly elected state administrations or newly
appointed regulators;
- - The timing and amount of the Company's revenues are subject to a number
of factors, including, but not limited to, the timing of customers' decisions
to enter into large license agreements with the Company;
- - Unforeseen events or adverse economic or business trends may
significantly increase cash demands beyond those currently anticipated or
affect the Company's ability to generate/raise cash to satisfy financing
needs;
- - The Company's operations have not proven to be significantly seasonal,
although quarterly revenues and net income can be expected to vary at times;
- - Although the Company cannot accurately determine the amounts
attributable thereto, the Company has been affected by inflation through
increased costs of employee compensation and other operating expenses.
- - Many of the Company's current and potential customers are or will spend
significant amounts of money to make their existing information systems
capable of handling the year 2000.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
<PAGE>
statements, as well as the reported amounts of revenues and expenses during
the reporting period. Changes in the status of certain matters or facts or
circumstances underlying these estimates could result in material changes in
these estimates, and actual results could differ from these estimates.
Because of the foregoing factors, as well as other factors affecting the
Company's operating results, past financial performance should not be
considered to be a reliable indicator of future performance, and investors
should not use historical trends to anticipate results or trends in future
periods.
YEAR 2000 READINESS
Many existing computer programs were designed to use only two digits to
identify a year in date fields. If not corrected, these applications could
fail or produce erroneous results when working with dates in the Year 2000 and
beyond. This Year 2000 issue may potentially affect the Company in four
areas: its product offerings, its services offerings, third-party products
used internally, and its suppliers. The Company's various business units have
been responsible for the assessment, remediation, validation and
implementation of Year 2000 corrective actions.
The application code of the Company's primary product offerings, S3+,
Series II , INSURE/90, POINT , CyberLife and CYBERTEK CK/4 products, were
either initially designed or have been updated in their currently available
releases to be capable of processing and storing date data with dates in both
the twentieth (1900's) and twenty-first (2000's) centuries. The Company is
currently conducting an inventory and verifying the Year 2000 readiness of the
third-party products with which these Company applications are designed to
operate in order to validate that no unanticipated Year 2000 issues exist. In
addition, the Company also is in the process of conducting an inventory and
assessing other Company and third-party products previously licensed by the
Company to customers to determine if any remediation efforts may be required
in relation to these products.
In its services offerings, the Company has assessed and commenced Year
2000 remediation of the applications used in processing the data of its
Information Technology Outsourcing and Business Process Outsourcing services
customers. Some of these remediation efforts are complete and some are still
in various stages of coding, testing or implementation. The Company intends
to complete these Year 2000 remediation efforts and required testing, in a
Year 2000 test environment, prior to the need for these services to process
data involving dates in the twenty-first century.
The primary third-party products used by the Company for its internal
operation include its data center hardware and software, internal financial
systems, and network and PC hardware and software. The Company's Blythewood
data center has completed its hardware and operating software inventory
assessments and has substantially completed the remediation efforts of
updating these hardware and software assets for the Year 2000 requirements. As
of July 1, 1998, Lockheed Martin took over the data processing equipment and
operational control of the Blythewood data center and remaining remediation
<PAGE>
efforts will be coordinated with them. The Company's Australian and European
data centers also have completed their inventory assessment and are
implementing the hardware and operating software enhancements required for
Year 2000 remediation.
In 1996, the Company commenced the process of identifying, selecting and
implementing an enterprise wide financial and human resources system to
replace its existing systems. The selected solution is currently being
implemented, is designed to meet Year 2000 requirements, and is scheduled to
be operational at the end of 1998. 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. 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.
Finally, the primary suppliers upon whom the Company's services are
dependent are electric utility and telephone companies who provide services to
the Company's various offices and data centers. If these services are
interrupted for a prolonged period due to the suppliers' Year 2000 problems,
it will disrupt the Company's ability to provide its services to customers,
notwithstanding the backup battery and diesel power supplies available for the
data center locations.
As discussed above, the Company has not yet fully completed its Year 2000
evaluations or its remediation efforts. If such remediation efforts are not
completed on a timely basis, Year 2000 issues could have a material impact on
the Company's operations and financial results. However, based upon the
Company's experience to date, at this time, it is not anticipated that the
completion of remaining Year 2000 remediation efforts will have an adverse
material effect upon the Company's financial position or results of
operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: Statements in this report that are not descriptions of historical facts
may be forward-looking statements that are subject to risks and uncertainties,
including economic, competitive and technological factors affecting the
Company's operations, markets, products, services and prices, as well as other
specific factors discussed 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 2, Contingencies, of Notes to Consolidated Financial Statements,
which is incorporated by reference in this Item.
ITEMS 2, and 3 are not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders, held on May 12, 1998,
the Company's stockholders approved: (i) the election of two directors, Joseph
D. Sargent (15,847,241 votes for and 117,835 withheld) and G. Larry Wilson
(15,847,155 votes for and 117,921 withheld) to serve a term of three years;
and (ii) the ratification of the selection of Coopers & Lybrand, LLP as
independent auditors (15,965,076 votes for, 1,949 votes against and 6,387
abstentions).
The following directors' terms continued through the 1998 Annual Meeting
of Stockholders: Alfred R. Berkeley, III, Donald W. Feddersen, Dr. John M.
Palms, John P. Seibels and Richard G. Trub.
ITEM 5. OTHER INFORMATION
The Securities and Exchange Commission (the "SEC") recently amended Rule
14a-4, which governs the use by the Company of discretionary voting authority
with respect to shareholder proposals. SEC Rule 14a-4c(1) provides that, if
the proponent of a shareholder proposal fails to notify the Company at least
45 days prior to the month and day of mailing the prior year's proxy
statement, the proxies of the Company's management would be permitted to use
their discretionary authority at the Company's next annual meeting of
shareholders if the proposal were raised at the meeting without any discussion
of the matter in the proxy statement. For purposes of the Company's 1999
Annual Meeting of Shareholders, this deadline is February 10, 1999.
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 filed a report under Item 5 on Form 8-K on May 12, 1998,
disclosing the stock split described in Note 5 of Notes to Consolidated
Financial Statements. No financial statements were filed with this 8-K.
<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POLICY MANAGEMENT SYSTEMS CORPORATION
-------------------------------------
(Registrant)
Date: August 11, 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)
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)
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)
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)
27. FINANCIAL DATA SCHEDULES
A. Six Months Ended June 30, 1998 filed herewith (EDGAR version only)
B. Six Months Ended June 30, 1997, as restated, filed herewith (EDGAR
version only)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS OF
POLICY MANAGEMENT SYSTEMS CORPORATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 25001
<SECURITIES> 20
<RECEIVABLES> 115932
<ALLOWANCES> 2141
<INVENTORY> 0
<CURRENT-ASSETS> 171974
<PP&E> 263873
<DEPRECIATION> 140001
<TOTAL-ASSETS> 614315
<CURRENT-LIABILITIES> 91328
<BONDS> 0
0
0
<COMMON> 368
<OTHER-SE> 427299
<TOTAL-LIABILITY-AND-EQUITY> 614315
<SALES> 0
<TOTAL-REVENUES> 285310
<CGS> 0
<TOTAL-COSTS> 237175
<OTHER-EXPENSES> 4912
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1481
<INCOME-PRETAX> 42836
<INCOME-TAX> 15987
<INCOME-CONTINUING> 26849
<DISCONTINUED> (64)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26785
<EPS-PRIMARY> .73<F1>
<EPS-DILUTED> .68<F1>
<FN>
<F1>
ON JUNE 15, 1998, POLICY MANAGEMENT SYSTEMS CORPORATION EFFECTED A
TWO-FOR-ONE STOCK SPLIT. PRIOR FINANCIAL DATA SCHEDULES HAVE NOT
BEEN RESTATED FOR THE STOCK SPLIT.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS OF
POLICY MANAGEMENT SYSTEMS CORPORATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 9626
<SECURITIES> 2496
<RECEIVABLES> 132824
<ALLOWANCES> 764
<INVENTORY> 0
<CURRENT-ASSETS> 178327
<PP&E> 248857
<DEPRECIATION> 132055
<TOTAL-ASSETS> 580037
<CURRENT-LIABILITIES> 98591
<BONDS> 0
0
0
<COMMON> 182
<OTHER-SE> 379853
<TOTAL-LIABILITY-AND-EQUITY> 580037
<SALES> 0
<TOTAL-REVENUES> 238911
<CGS> 0
<TOTAL-COSTS> 201585
<OTHER-EXPENSES> 4909
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2573
<INCOME-PRETAX> 31305
<INCOME-TAX> 11681
<INCOME-CONTINUING> 19624
<DISCONTINUED> 1162
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20786
<EPS-PRIMARY> .57
<EPS-DILUTED> .56
</TABLE>
