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, 1999
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.
35,572,006 Common shares, $.01 par value, as of November 5, 1999.
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, 1998.
<PAGE>
<TABLE>
<CAPTION>
POLICY MANAGEMENT SYSTEMS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
<S> <C>
Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1999 and 1998 . . . . . 3
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998 . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income for the Nine
Months Ended September 30, 1999 . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . 28
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . 28
Signatures. . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I
FINANCIAL INFORMATION
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
------ ------ ------ ------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues
Licensing. . . . . . . . . . . . . . . . $ 37,383 $ 31,454 $115,846 $ 89,694
Services . . . . . . . . . . . . . . . . 131,405 119,849 386,763 346,919
---------- --------- --------- ---------
168,788 151,303 502,609 436,613
---------- --------- --------- ---------
Operating expenses
Cost of revenues
Employee compensation and benefits. . . 78,686 65,117 228,796 193,084
Computer and communications expenses. . 12,644 10,892 36,275 26,612
Depreciation and amortization of
property, equipment and
capitalized software costs . . . . . . 108,543 15,647 141,777 46,550
Other costs & expenses. . . . . . . . . 15,238 4,778 32,041 17,805
Selling, general and administrative
expenses . . . . . . . . . . . . . . . 29,230 26,035 83,243 75,593
Amortization of goodwill and
other intangibles. . . . . . . . . . . 9,978 2,673 16,516 7,585
Restructuring and other charges. . . . . 22,159 - 22,159 -
Acquisition related charges. . . . . . . - 3,732 - 3,732
---------- --------- --------- ---------
276,478 128,874 560,807 370,961
---------- --------- --------- ---------
Operating (loss) income . . . . . . . . . (107,690) 22,429 (58,198) 65,652
Equity in earnings of
unconsolidated affiliates. . . . . . . 320 129 609 567
Minority interest . . . . . . . . . . . . (14) (44) (94) (74)
Other income and expenses:
Investment income . . . . . . . . . . . 239 390 653 1,076
Interest expense and other charges. . . (3,564) (993) (7,824) (2,474)
---------- --------- --------- ---------
(3,325) (603) (7,171) (1,398)
---------- --------- --------- ---------
(Loss) income from continuing operations
before income taxes . . . . . . . . . . (110,709) 21,911 (64,854) 64,747
Income tax (benefit) expense. . . . . . . (40,261) 8,740 (23,294) 24,727
---------- --------- --------- ---------
(Loss) income from continuing operations. (70,448) 13,171 (41,560) 40,020
Discontinued operations:
Income from operations of
discontinued operations less
applicable income taxes of $252 . . . . - - - 389
Loss on disposal of discontinued
operations less applicable income
taxes of $2,439 . . . . . . . . . . . . - - - (453)
---------- --------- --------- ---------
- - - (64)
---------- --------- --------- ---------
Net (loss) income . . . . . . . . . . . . $ (70,448) $ 13,171 $(41,560) $ 39,956
========== ========= ========= =========
Basic earnings per share:
(Loss) income from continuing operations $ (1.99) $ 0.36 $ (1.17) $ 1.09
========== ========= ========= =========
Diluted earnings per share:
=========================================
(Loss) income from continuing operations $ (1.99) $ 0.33 $ (1.17) $ 1.01
========== ========= ========= =========
Weighted average common shares. . . . . . 35,355 36,458 35,610 36,635
Weighted average common shares
assuming dilution . . . . . . . . . . . 35,355 39,549 35,610 39,471
<FN>
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
September 30, December 31,
1999 1998
------ ------
(In thousands, except share data)
<S> <C> <C>
Assets
Current assets
Cash and equivalents $ 28,877 $ 26,013
Marketable securities 228 -
Receivables, net of allowance for uncollectible
amounts of $2,437 ($2,051 at 1998) 140,542 123,427
Accrued revenues 41,991 26,558
Deferred income taxes 7,494 9,336
Other receivable - 11,279
Prepaids 16,455 8,645
Other 15,386 11,968
--------- ---------
Total current assets 250,973 217,226
Property and equipment, at cost less accumulated
depreciation and amortization of $126,307
($128,363 at 1998) 144,071 135,436
Accrued revenues 12,748 7,844
Income tax receivable 4,041 4,041
Goodwill and other intangibles, net 121,742 81,401
Capitalized software costs, net 166,453 220,908
Deferred income taxes 24,371 24,787
Investments 10,427 9,661
Other 17,444 17,394
--------- ---------
Total assets $752,270 $718,698
========= =========
Liabilities
Current liabilities
Accounts payable and accrued expenses $ 47,549 57,129
Current portion of long-term debt 30,400 15,812
Income taxes payable 6,454 9,202
Unearned revenues 20,095 15,804
Accrued restructuring and other charges 4,797 806
Other 776 182
--------- ---------
Total current liabilities 110,071 98,935
Long-term debt 202,000 85,000
Deferred income taxes 69,662 98,233
Accrued restructuring and other charges 6,031 677
Other 9,026 2,843
--------- ---------
Total liabilities 396,790 285,688
--------- ---------
Minority interest 635 526
Stockholders' equity
Special stock, $.01 par value, 5,000,000 shares
authorized - -
Common stock, $.01 par value, 75,000,000 shares
authorized, 35,551,917 shares issued and
outstanding (36,357,139 at December 31, 1998) 356 364
Additional paid-in capital 56,460 82,396
Retained earnings 317,894 359,454
Accumulated other comprehensive income (9,804) (9,730)
Stock employee compensation trust (10,061) -
--------- ---------
Total stockholders' equity 354,845 432,484
--------- ---------
Total liabilities and stockholders' equity $752,270 $718,698
========= =========
<FN>
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
Accumulated
Other Stock
Additional Comprehensive Employee
Common Paid-In Retained Income(Loss) Compensation
Stock Capital Earnings (1) Trust Total
----- ------- --------- ------------ --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998. . . $ 364 $ 82,396 $359,454 $(9,730) $ - $432,484
Comprehensive income:
Net loss . . . . . . . . . . . - - (41,560) - - (41,560)
Other comprehensive income,
net of tax:
Foreign currency
translation adjustments . . - - - (74) - (74)
---------
Total comprehensive income
(loss). . . . . . . . . . . . (41,634)
---------
Purchase of shares for SECT . . - - - - (10,094) (10,094)
Restricted stock vested . . . . - (3) - - 19 16
Restricted stock forfeited. . . - - - - 14 14
Stock options exercised
(208,378 shares). . . . . . . 2 7,102 - - 14 7,104
Repurchase of 1,013,600 shares
of common stock . . . . . . . (10) (33,035) - - - (33,045)
--------- --------- --------- -------- --------- ---------
BALANCE, SEPTEMBER 30, 1999 . . $ 356 $ 56,460 $317,894 $(9,804) $(10,061) $354,845
========= ========= ========= ======== ========= =========
<FN>
(1) Comprehensive income (loss) for the three months ended September 30, 1999 and 1998 was
$(67,519) and $14,744, respectively. Comprehensive income for the nine months ended September
30, 1998 was $39,727.
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
---------------------
1999 1998
------ ------
(In thousands)
<S> <C> <C>
Operating Activities
Net (loss) income $ (41,560) $ 39,956
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 163,085 58,993
Deferred income taxes (31,369) 1,517
Gain on disposal of discontinued operations - (1,986)
Acquisition related charges - 3,732
Changes in assets and liabilities:
Receivables (10,424) (974)
Accrued revenues (20,195) (4,039)
Other receivable 11,279 -
Accounts payable and accrued expenses (14,312) (14,127)
Accrued restructuring and other charges 13,200 85
Income taxes payable (3,033) 9,036
Unearned revenues 1,772 (7,422)
Other, net (9,170) (5,172)
---------- ---------
Cash provided from operations 59,273 79,599
---------- ---------
Investing Activities
Proceeds from sales/maturities of available-for-
sale securities 1,969 3,257
Proceeds from sales of held-to-maturity securities - 2,969
Proceeds from sale of business segment - 23,826
Acquisition of property and equipment (28,532) (45,287)
Capitalized internal software development costs (50,476) (43,599)
Business acquisitions (68,053) (29,629)
Proceeds from disposal of property and equipment 1,018 1,034
---------
Other (5,888) (6,775)
---------- ---------
Cash used by investing activities (149,962) (94,204)
---------- ---------
Financing Activities
Payments on long-term debt (219,312) (42,319)
Proceeds from borrowing under credit facility 348,900 81,500
Purchase of stock for Stock Employee
Compensation Trust (10,094) -
Issuance of common stock under stock option plans 7,104 28,801
---------
Repurchase of common stock (33,045) (69,660)
---------- ---------
Cash provided (used) by financing activities 93,553 (1,678)
---------- ---------
Net increase (decrease) in cash and equivalents 2,864 (16,283)
Cash and equivalents at beginning of period 26,013 32,179
---------- ---------
Cash and equivalents at end of period $ 28,877 $ 15,896
========== =========
Supplemental Information
Interest paid $ 6,494 $ 1,371
Income taxes paid 6,745 9,806
<FN>
Non-cash investing activities:
The Company transferred $11.2 million of property, plant and equipment
to Lockheed Martin in 1998 in exchange for other receivable collected in 1999.
See accompanying notes
</TABLE>
<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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 may
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 either have
been 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. For the
Company, the numerator is the same for the calculation of both basic and diluted
EPS. The denominator for basic and diluted EPS is the same for both the three
and nine month periods ended September 30, 1999 as the loss from operations
would otherwise cause the inclusion of common stock options to be anti-dilutive.
The following is a reconciliation of the denominator used in the EPS
calculations (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------- -------------
1999 1998 1999 1998
----- ----- ----- -----
Weighted Average Shares
- -----------------------
<S> <C> <C> <C> <C>
Basic EPS. . . . . . . . . . . 35,355 36,458 35,610 36,635
Effect of common stock options - 3,091 - 2,836
------ ------ ------ ------
Diluted EPS. . . . . . . . . . 35,355 39,549 35,610 39,471
====== ====== ====== ======
</TABLE>
Options to purchase 6,708,967 shares of common stock at a weighted average
price of $28.84 per share were outstanding but not included in the computations
of diluted EPS for the three and nine month periods ending September 30, 1999.
<PAGE>
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to current period
presentation.
NOTE 2. ACQUISITIONS
On June 30, 1999, the Company purchased DORN Technology Group, Inc. ("DORN"), a
risk and claims management company, for $32 million in cash plus additional
consideration of up to $30 million contingent upon the future performance of
DORN, to be expensed as incurred until 2001. DORN owns the Riskmaster claims
management software and the Quest healthcare facility software, and provides
risk and claims management software and services mainly to the US self-insured
market. The Company intends to grow DORN's existing services business and
further develop the Riskmaster and Quest systems to complement its suite of
claims products.
On June 30, 1999, the Company purchased Financial Administrative Services,
Inc.("FAS"), a provider of business process outsourcing ("BPO"), for $13 million
plus additional consideration of up to $12.0 million contingent on the future
performance of FAS, to be capitalized as additional goodwill when paid until
2005. FAS uses the Company's PolicyLink system to support the rapid introduction
of variable insurance products and annuities in a business process outsourcing
environment.
On March 31, 1999, the Company purchased Legalgard Partners, L.P. ("Legalgard"),
a legal cost containment business for $23.2 million plus additional
consideration of up to $4.3 million contingent upon the future performance of
Legalgard, to be expensed as incurred until 2003. Legalgard provides legal cost
containment services mainly to the US property and casualty insurance industry
using the Counsel Partnership System, a proprietary software system. The
Company intends to grow Legalgard's existing services business and develop the
Counsel Partnership System for licensing directly to insurance companies.
The acquisitions above have been recorded using the purchase method of
accounting. Accordingly, the Consolidated Statements of Operations of the
Company do not include the results of operations of the acquired businesses
before their respective dates of acquisition.
NOTE 3. SPECIAL CHARGES
The Company considers special charges to be unusual events or unusual
transactions related to continuing business activities.
The Company's operating results for the 1999 third quarter include $126.9
million in special charges of which $100.4 million are non-cash. These non-cash
charges result from a reevaluation of capitalized software costs in light of an
increasingly rapid pace of change in technology, changes in market forecasts,
and the write-down of certain intangibles largely related to past international
acquisitions. Cash charges of $26.5 million resulted from restructuring charges
incurred as the Company eliminated costs through reductions in force and space
requirements, and charges incurred in connection
<PAGE>
with the settlement of the Liberty Life litigation and resolution of disputes
with customers. The Consolidated Statements of Operations include these charges
as follows -
Depreciation and amortization of property, equipment and capitalized
software costs:
Depreciation and amortization of property, equipment and capitalized
software costs includes approximately $94.3 million of accelerated amortization
of capitalized software development costs. In accordance with the Company's
accounting policies and Statement of Financial Accounting Standards No. 86,
these costs were determined in the 1999 third quarter to be unrecoverable.
Amortization of goodwill and other intangibles:
Amortization of goodwill and other intangibles includes approximately $6.1
million of impairment charges related primarily to past international
acquisitions. These impairment charges were determined in the 1999 third
quarter in accordance with the Company's accounting policies and Statement of
Financial Accounting Standards No. 121.
Restructuring and other charges:
Restructuring and other charges includes approximately $12.6 million of
cash charges paid or to be paid as a result of initiatives taken by the Company
in the 1999 third quarter to eliminate costs through worldwide reductions in
force and space requirements.
The remaining $9.6 million of cash charges relate to the settlement of the
Liberty Life litigation, as more fully discussed in Note 4. "Contingencies".
Other costs and expenses:
Other costs and expenses include approximately $3.7 million of costs to
resolve disputes with customers.
Employee compensation and benefits:
Employee compensation and benefits includes approximately $0.6 million of
expatriate taxes.
NOTE 4. CONTINGENCIES
On September 23, 1999, the Company and Liberty Life Insurance Company and
certain of its affiliates ("Liberty") entered into a confidential settlement
agreement of previously disclosed litigation. (See Item 3, Legal Proceedings, of
Part I contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.) As a part of the settlement, both the Company and Liberty
agreed to release the other from all claims asserted and the lawsuit was
dismissed. As a result of the settlement the Company recorded a charge of $9.6
million for legal expenses associated with this litigation.
On April 29, 1999, the Company received notice from the Internal Revenue Service
("IRS") of proposed adjustments to its 1994, 1995 and 1996 federal income tax
returns. Should the IRS prevail in its position, a charge to income of
approximately $16.3 million would result. The Company strongly disagrees
<PAGE>
with the proposed adjustments, believes it has meritorious arguments against the
proposed adjustments and intends to vigorously defend its position.
In addition, there are various 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 5. 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 "property and casualty"). 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 "life and financial solutions"). 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 and outsourcing to the property and casualty and life
insurance markets primarily in Europe, Asia, Australia, Canada, Central America
and South Africa.
4. Property and casualty information services. This segment provided
information services, principally motor vehicle records and claims histories, to
US property and casualty insurers. It was sold in August 1997 and is included
in discontinued operations.
5. Life information services. This segment provided information services,
principally physician reports and medical histories, to US life insurers. It
was sold in May 1998 and is included in discontinued operations.
<PAGE>
Information about the Company's operations for the three and nine months ended
September 30, 1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1999 1998 1999 1998
------ ------ ------ ------
REVENUES FROM EXTERNAL CUSTOMERS
<S> <C> <C> <C> <C>
Property and casualty. . . . . . . . . . $ 74,032 $ 69,832 $224,747 $203,580
Life and financial solutions . . . . . . 51,837 38,081 141,001 101,842
---------- --------- --------- ---------
Total US revenues. . . . . . . . . . . . 125,869 107,913 365,748 305,422
International. . . . . . . . . . . . . . 42,919 43,390 136,861 131,191
---------- --------- --------- ---------
Total revenues from
continuing operations . . . . . . . $ 168,788 $151,303 $502,609 $436,613
========== ========= ========= =========
Discontinued operations. . . . . . . . . $ - $ - $ - $ 11,968
(LOSS) INCOME FROM CONTINUING OPERATIONS
Property and casualty. . . . . . . . . . $ (67,086) $ 19,688 $(24,602) $ 55,289
Life and financial solutions . . . . . . (1,527) 9,558 17,517 24,049
Corporate and US administrative. . . . . (12,129) (10,000) (28,373) (23,678)
---------- --------- --------- ---------
Total US operating (loss) income . . . (80,742) 19,246 (35,458) 55,660
---------- --------- --------- ---------
International. . . . . . . . . . . . . . (24,996) 5,234 (17,146) 16,104
International administrative . . . . . . (1,952) (2,051) (5,594) (6,112)
---------- --------- --------- ---------
Total international. . . . . . . . . . (26,948) 3,183 (22,740) 9,992
---------- --------- --------- ---------
Operating (loss) income. . . . . . . . (107,690) 22,429 (58,198) 65,652
Equity in earnings of
unconsolidated affiliates. . . . . . . 320 129 609 567
Minority interest. . . . . . . . . . . . (14) (44) (94) (74)
Other income and expenses. . . . . . . . (3,325) (603) (7,171) (1,398)
Income tax (benefit) expense . . . . . . (40,261) 8,740 (23,294) 24,727
---------- --------- --------- ---------
(Loss)income from continuing
operations . . . . . . . . . . . . . $ (70,448) $ 13,171 $(41,560) $ 40,020
========== ========= ========= =========
Discontinued operations
Property and casualty. . . . . . . . . $ - $ - $ - $ (1,018)
Life . . . . . . . . . . . . . . . . . - - - 3,672
Other income and expenses. . . . . . . - - - (27)
Income taxes . . . . . . . . . . . . . - - - (2,691)
---------- --------- --------- ---------
Discontinued operations, net . . . . . $ - $ - $ - $ (64)
========== ========= ========= =========
<FN>
The loss from continuing operations for the three and nine month periods ended
September 30, 1999 included special charges of approximately $126.9 million related
to the following business segments: property and casualty ($85.9 million), life
($10.6 million), international ($26.8 million), and corporate ($3.6 million).
</TABLE>
<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the consolidated financial statements and
notes thereto contained in Part I of this report on Form 10-Q and with the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
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>
1999 vs. 1998
Percent
Percentage of Revenues Increase (Decrease)
------------------------ -------------------
Three Nine Three Nine
Months Ended Months Ended Months Months
September 30 September 30 Ended Ended
------------ ------------
1999 1998 1999 1998 September 30
----- ----- ----- ----- --------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Licensing . . . . . . . . . . . . . . . 22.2% 20.8% 23.1% 20.5% 19% 29%
Services. . . . . . . . . . . . . . . . 77.8 79.2 76.9 79.5 (10) (12)
------- ------ ------ ------
100.0 100.0 100.0 100.0 12 15
------- ------ ------ ------
Operating expenses
Cost of revenues
Employee compensation and benefits . . 46.6 43.0 45.5 44.2 21 19
Computer & communication expenses. . . 7.5 7.2 7.2 6.1 16 36
Depreciation & amortization
of property, equipment &
capitalized software costs. . . . . . 64.3 10.3 28.2 10.7 594 205
Other costs & expenses . . . . . . . . 9.0 3.2 6.4 4.1 219 80
Selling, general &
administrative expenses . . . . . . . 17.3 17.2 16.6 17.3 12 10
Amortization of goodwill and
other intangibles . . . . . . . . . . 5.9 1.8 3.3 1.7 273 118
Restructuring and other charges . . . . 13.2 - 4.4 - - -
Acquisition related charges . . . . . . - 2.5 - .9 - -
------- ------ ------ ------
163.8 85.2 111.6 85.0 115 51
------- ------ ------ ------
Operating (loss) income. . . . . . . . . (63.8) 14.8 (11.6) 15.0 (580) (189)
Equity in earnings of unconsolidated
affiliates. . . . . . . . . . . . . . 0.2 0.1 0.1 0.1 148 7
Other income and expenses. . . . . . . . (2.0) (0.4) (1.4) (0.3) 451 413
------- ------ ------ ------
(Loss) income from continuing operations
before income taxes. . . . . . . . . . (65.6) 14.5 (12.9) 14.8 (605) (200)
Income tax (benefit) expense . . . . . . (23.9) 5.8 (4.6) 5.6 (560) (194)
------- ------ ------ ------
(Loss) income from continuing operations (41.7) 8.7 (8.3) 9.2 (634) (204)
Discontinued operations, net . . . . . . - - - - - -
------- ------ ------ ------
Net (loss) income. . . . . . . . . . . . (41.7)% 8.7% (8.3)% 9.2% (634)% (204)%
======= ====== ====== ======
</TABLE>
<PAGE>
THREE MONTH COMPARISON
REVENUES
<TABLE>
<CAPTION>
Three Months
Ended September 30,
-------------------
Licensing 1999 1998 Change
----- ----- ------
(Dollars in millions)
<S> <C> <C> <C>
Initial charges. . . . . . . $19.2 $14.7 31%
Monthly charges. . . . . . . 18.1 16.8 8
------ ------
Total licensing revenues . . 37.3 $31.5 18%
====== ======
Percentage of total revenues 22.1% 20.8%
------ ------
</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 charges increased $4.6 million for the third quarter of
1999 compared with the third quarter of 1998, with the following increases by
business segment: property and casualty up 122% ($5.6 million) primarily
related to Point, internet and claims products; life and financial solutions
down 19% ($1.1 million) with increases in life enterprise systems licensing more
than offset by weak licensing of lending products; and international up 2% ($0.1
million).
Initial license charges for the third quarter of 1999 include $2.0 million of
right-to-use licenses. This compares with $2.7 million in right-to-use licenses
for the third quarter of 1998. Right-to-use licenses represent the acquisition
by certain customers of the right-to-use component of their remaining monthly
license charge obligation, if any, plus the acquisition of a perpetual
right-to-use the product thereafter. Since these types of licenses represent an
acceleration of future revenues, they reduce future monthly license charges. The
Company expects the occurrences of right-to-use licenses will be reduced in the
future.
Monthly license charges increased $1.3 million for the third quarter of 1999
compared with the third quarter of 1998 with the following increases or
decreases by business segment: property and casualty down 7% ($0.6 million) due
to weak 1998 licensing and the effect of right-to-use licenses; life and
financial solutions up 32% ($1.2 million) on strong 1998 initial license
activity; and international up 18% ($0.7 million) principally due to increased
licensing revenues in the United Kingdom and the Asia/Pacific region during
1998.
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
<PAGE>
license revenues for the last eight quarters expressed as a percentage of total
revenues for each of the periods presented:
1999 1998 1997
------------------ -------------------------- ----
3rd 2nd 1st 4th 3rd 2nd 1st 4th
------------------ ------------------------- ----
(Dollars in millions)
Initial license revenues $19.2 $25.6 $18.7 $27.3 $14.7 $13.0 $12.6 $25.1
% of total revenues 11% 15% 12% 16% 10% 9% 9% 17%
The increasing rate of change in the insurance and banking industries
coupled with the rapid evolution of eCommerce technology and the volatility of
initial license revenues, as illustrated by the above table, is leading the
Company to consider new business models that place less emphasis on initial
license revenue and place more emphasis on transaction based revenue. The
Company expects this transition to occur gradually over the next several years
and will likely affect the amount and timing of revenue recognized in the
Company's financial statements.
<TABLE>
<CAPTION>
Three Months
Ended September 30,
-------------------
Services 1999 1998 Change
----- ----- ------
(Dollars in millions)
<S> <C> <C> <C>
Professional and ITO . . . . $104.6 $106.0 (1)%
Business Process Outsourcing 26.2 12.6 108 %
Other. . . . . . . . . . . . 0.6 1.3 (54)%
------- -------
Total Services . . . . . . . $131.4 $119.9 10 %
======= =======
Percentage of total revenues 77.9% 79.2%
------- -------
</TABLE>
Total Services revenues increased $11.5 million for the third quarter of 1999
compared with the third quarter of 1998, with the following increases or
decreases by business segment: property and casualty down 1% ($0.8 million)
with declines in implementation related professional services due to the effect
of weak 1998 licensing and the redeployment of staff from customers' Y2K
projects ending late last year partially offset by a 25% increase in BPO; life
insurance and financial solutions up 48% ($13.6 million) reflecting
approximately 12% growth in traditional professional services and strong growth
in BPO; and international down 4% ($1.3 million) with increases in Europe being
offset by decreases in the Asia/Pacific region.
OPERATING EXPENSES
COST OF REVENUES
Employee compensation and benefits increased 21% for the third quarter of
1999 compared with the third quarter of 1998. The net increase results
principally from higher salary costs in property and casualty and life
professional services and the costs associated with growth in staffing in fast
growing areas such as claims, lending, eCommerce and BPO. Compensation and
benefits increased 11% ($2.1 million) internationally and 25% ($11.5 million)
domestically.
<PAGE>
Computer and communications expenses increased 16% for the third quarter of 1999
compared with the third quarter of 1998. This increase is principally the result
of increased: communications volumes; network and PC related expenses; and
license fees for data center operating software.
Depreciation and Amortization increased significantly over the 1998 third
quarter principally due to the write-off or write-down of certain software
described below under "Special charges". Excluding these charges, depreciation
and amortization decreased 9% as a result of the 1999 third quarter benefit from
the write-offs partially offset by increased software amortization related to
product releases during the last twelve months and increased depreciation of
property and equipment. As a percentage of revenue, depreciation and
amortization, excluding special charges, decreased to 8% from 10% in the 1998
third quarter.
Other operating costs and expenses increased approximately $10.5 million
over the 1998 third quarter primarily due to approximately $3.7 million of
charges related to the resolution of customer disputes. The remaining increase
is due to rent on new facilities, higher non-billable travel, and a decrease in
the amounts capitalized related to software and internal use systems.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 12% for the third
quarter of 1999 compared with the third quarter of 1998, but remained relatively
unchanged as a percentage of revenue.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles increased significantly over
the 1998 third quarter principally due to the write-off or write-down of certain
acquisition intangibles discussed below under "Special charges". Before the
effect of these charges, amortization of goodwill and intangibles increased 47%
due to the acquisitions of The Leverage Group, Inc. in the third quarter of
1998, and Legalgard, Dorn and FAS in prior 1999 quarters.
SPECIAL CHARGES
The Company considers special charges to include unusual events or unusual
transactions related to continuing business activities.
During the 1999 third quarter, the Company commenced assessments of all
major aspects of its business based upon the increasing rate of change in
technology in its marketplace due to the internet and the rapid adoption of
eCommerce. In addition, the Company also initiated a number of international and
domestic restructuring and cost reduction initiatives. This assessment included
various international and domestic intangibles and capitalized software costs.
<PAGE>
As a result of actions taken in the 1999 third quarter, the Consolidated
Statements of Operations includes special charges of approximately $126.9
million as follows -
Depreciation and Amortization of property, equipment and capitalized
software costs:
Depreciation and amortization of property, equipment and capitalized
software costs includes approximately $94.3 million of non-cash, accelerated
amortization of capitalized software development costs that were determined in
the 1999 third quarter to be unrecoverable.
Approximately $77.6 million of this amount relates to several of the
Company's software products that use third party technology that is rapidly
becoming obsolete. The single largest component of this charge relates to IBM
OS/2 components of Series III , which will no longer be marketed. The second
largest component relates to out-of-date, mainframe, batch processing
technology. The remainder relates to several products based on older
programming languages that will not be marketed in the future.
The remaining $16.7 million of the $94.3 million of accelerated
amortization relates to other products that will no longer be marketed for
numerous reasons unrelated to technological change.
Of the total $94.3 million, $77.6 million relates to the property and
casualty group and $16.7 million relates to the international group.
The Company has ceased marketing the written-off or written-down products and
any future cost associated with the continued support of these products will be
expensed as incurred.
The amount of these charges was determined in accordance with the Company's
accounting policies and Statement of Financial Accounting Standards No. 86.
Following the Company's third quarter decision to cease marketing these
products, the Company determined the estimated net realizable value of each
product. If net book value exceeded net realizable value, then net book value
was reduced to its estimated net realizable value.
Amortization of goodwill and other intangibles:
Amortization of goodwill and other intangibles includes approximately $6.1
million of accelerated amortization of intangibles that were determined in the
1999 third quarter to be impaired in accordance with the Company's accounting
policies and Statement of Financial Accounting Standards no. 121. These
intangibles relate primarily to past international acquisitions for which the
Company estimates projected net cash flows will not be adequate to recover its
unamortized investments.
<PAGE>
Restructuring and other charges:
Restructuring and other charges, which are discussed below, may be
summarized as follows as of September 30, 1999 (in millions) -
<TABLE>
<CAPTION>
1999
Third
Quarter To Be
Charges Paid Paid
-------- ------ ------
<S> <C> <C> <C>
Facilities. . . . . $ 5.3 $ - $ 5.3
Personnel . . . . . 7.3 2.2 5.1
Litigation. . . . . 9.6 6.7 2.9
----- ---- -----
Total restructuring
and other charges $22.2 $8.9 $13.3
===== ==== =====
</TABLE>
Restructuring and other charges includes approximately $12.6 million of
cash charges paid or to be paid as a result of initiatives taken by the Company
in the 1999 third quarter to eliminate costs through worldwide reductions in
force and space requirements. Approximately $7.3 million of this amount relates
to benefits payable to staff who were terminated. Approximately $5.3 million of
this amount relates to minimum lease obligations remaining on vacated offices,
reduced by estimated sublease income. The charges related primarily to actions
taken in the property and casualty and international business groups.
The remaining approximately $9.6 million of cash charges relates to the
settlement of the Liberty Life litigation. On September 23, 1999, the
Company and Liberty Life Insurance Company and certain of its affiliates
("Liberty") entered into a confidential settlement agreement of previously
disclosed litigation. (See Item 3, Legal Proceedings, of Part I contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.) As a
part of the settlement, both the Company and Liberty agreed to release the other
from all claims asserted and the lawsuit was dismissed. As a result of the
settlement the Company recorded a loss of $9.6 million for legal expenses
associated with this litigation.
Other costs and expenses:
Other costs and expenses includes approximately $3.7 million of costs to
resolve disputes with customers.
Employee compensation and benefits:
Employee compensation and benefits includes approximately $0.6 million of
expatriate taxes.
OPERATING INCOME (LOSS)
The 1999 third quarter produced an operating loss of $107.6 million
compared with the 1998 third quarter operating income of $22.4 million resulting
primarily from the write-off or write-down of certain software, intangibles
related to business acquisitions and restructuring and other charges described
above, Before these charges, 1999 third quarter operating
<PAGE>
income decreased 26% compared with the 1998 third quarter. Also before these
charges, decreases in segment operating income were: property and casualty
decreased 5%, life and financial solutions decreased 5% and international
decreased 65% (see discussion of "Revenues" and "Operating Expenses" above).
OTHER INCOME AND EXPENSE
Other income and expense is comprised primarily of interest expense which
increased $2.6 million for the third quarter of 1999 compared with the third
quarter of 1998. This increase is due to higher levels of borrowed funds under
the Company's credit facilities which were incurred principally to finance
business acquisitions and repurchases of the Company's stock during prior
periods. The average nominal interest rate applicable to borrowings under the
Company's credit facilities during the third quarter of 1999 was 5.7%.
INCOME TAXES
The effective income tax (benefit) rate (income taxes expressed as a percentage
of pre-tax income) on continuing operations including special charges was 36.4%
and 39.9% for the third quarter of 1999 and 1998, respectively. The effective
income tax rate on continuing operations before special charges was 33.1% for
the third quarter of 1999.
The effective income tax rate on continuing operations before special charges
for the third quarter of 1999 was lower than the federal statutory rate of 35%
principally due to the effect of foreign income taxes from operations in
countries with tax rates lower than the United States.
NINE MONTH COMPARISON
REVENUES
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
Licensing 1999 1998 Change
----- ----- ------
(Dollars in millions)
<S> <C> <C> <C>
Initial charges. . . . . . . $ 63.5 $40.3 58%
Monthly charges. . . . . . . 52.3 49.4 6
------- ------
Total licensing revenues . . $115.8 $89.7 29%
======= ======
Percentage of total revenues 23.0% 20.5%
------- ------
</TABLE>
Initial license revenues increased $23.2 million for the first nine months
of 1999 compared with the first nine months of 1998, with the following
increases by business segment: property and casualty up 163% ($21.3 million)
with increases in Point, internet and claims products, one new S3+ license and
two S3+ license expansions, combined with increased revenue from right-to-use
transactions; life and financial solutions up 7% ($0.9 million)with increases in
life enterprise system licenses offset partially by declines in lending system
licenses; and international up 7% ($1.0 million) with increases in continental
Europe offset partially by declines in the United Kingdom and the Asia/Pacific
region.
<PAGE>
Initial license charges for the first nine months of 1999 include right-to-use
licenses of $13.7 million compared with $9.7 million for the first nine months
of 1998. Right-to-use licenses represent the acquisition by certain customers
of the right-to-use component of their remaining monthly license charge
obligation, if any, plus the acquisition of a perpetual right-to-use the product
thereafter. Since these types of licenses represent an acceleration of future
revenues, they reduce future monthly license charges. The Company expects the
occurrence of right-to-use licenses will be reduced in the future.
Initial license charges for the first three quarters of 1999 include a $2.9
million license with the former owners of Legalgard. In addition, the former
owners of FAS licensed several of the Company's life and financial solutions
products for $2.0 million.
Two remarketing agreements for the Claims Outcome Advisor ("COA ")
product, totaling $3.5 million, are included in initial licensing revenues for
the first nine months of 1999. These non-exclusive agreements provide two of the
Company's nationally recognized vendors the right to re-license COA to the
self-insured market. The Company also renegotiated an extension to its long-term
license agreement for operating software used in the Company's data center with
one of these vendors.
Initial license charges for the first three quarters of 1999 also include $2.6
million of revenue from the sale of hardware remarketed by the Company in
conjunction with licenses of its software.
Monthly license charges increased $2.9 million for the first nine months of
1999 compared with the first nine months of 1998 with the following increases or
decreases by business segment: property and casualty down 12% ($3.3 million)
due to weak 1998 licensing and the effect of right-to-use licenses; life and
financial solutions up 43% ($4.5 million) on strong 1998 initial license
activity; and international up 14% ($1.7 million) principally due to increased
licensing activity in 1998.
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
Services 1999 1998 Change
----- ----- ------
(Dollars in millions)
<S> <C> <C> <C>
Professional and ITO . . . . $ 325.6 $310.4 5%
Business Process Outsourcing 58.4 33.0 77
Other. . . . . . . . . . . . 2.8 3.5 (20)
-------- ------
Total Services . . . . . . . $ 386.8 $346.9 12%
======== ====== ======
Percentage of total revenues 77.0% 79.5%
---------------
</TABLE>
Total Services revenues increased $39.9 million for the first nine months of
1999 compared with the first nine months of 1998, with the following increases
by business segment: property and casualty up 2% ($3.2 million) with a 6%
decline in professional and ITO services offset by a 44% rise in BPO; life
insurance and financial solutions up 43% ($33.8 million) with a 27% increase in
professional and ITO services enhanced by a 185% increase in BPO;
<PAGE>
and international up 3% ($2.9 million) all in professional and ITO services. The
rise in BPO revenue reflects increased volume with existing customers.
OPERATING EXPENSES
COST OF REVENUES
Employee compensation and benefits increased 19% for the first nine months
of 1999 compared with the first nine months of 1998. The net increase results
principally from higher salary costs in property and casualty and life
professional services, and the costs associated with growth in staffing in such
fast growing areas as claims, lending, eCommerce and BPO. These increases were
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. Compensation and benefits increased 13% ($7.6
million) internationally and 21% ($29.0 million) domestically.
Computer and communications expenses increased 36% for the first nine months of
1999 compared with the first nine months of 1998. At the beginning of the third
quarter of 1998, the company entered into a data center outsourcing agreement
with Lockheed Martin entered into June 30, 1998. As a result, certain costs
previously included in employee compensation and benefits are now included in
computer and communication expense. The savings from the outsourcing agreement
were offset due primarily to increases in communications volumes, network and PC
related expenses and increased license fees for data center operating software.
Depreciation and Amortization increased significantly for the first nine months
of 1999 compared with the first nine months of 1998 principally due to the
write-off or write-down of certain software described below under "Special
charges". Excluding these charges, depreciation and amortization increased 2%
due to increased software amortization related to product releases during the
last twelve months and increased depreciation of property and equipment
partially offset by the benefit of the third quarter charges. As a percentage of
revenue, depreciation and amortization, excluding the charges decreased to 9% of
revenue from 11% in the first nine months of 1999 compared with the first nine
months of 1998.
Other operating costs and expenses increased 80% for the first nine months of
1999 compared with the first nine months of 1998, due to the inclusion of
approximately $3.7 million of charges related to the resolution of disputes with
customers and $2.4 million of costs for computer hardware sold to customers in
conjunction with software licenses in which the corresponding revenue is
included in initial licensing revenue. Other increases for the first nine
months of 1999 include rent on new facilities, higher non-billable travel, and a
decrease in the capitalization of software and internal use systems costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 10% for the first
nine months of 1999 compared with the first nine months of 1998, but declined
<PAGE>
slightly as a percentage of revenue.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles increased 118% for the first
nine months of 1999 compared with the first nine months of 1998, principally due
to the impairment charges recorded in the third quarter which are described
above under "Special charges". Amortization related to the acquisition of The
Leverage Group, Inc. in the third quarter of 1998 and Legalgard, Dorn and FAS in
prior 1999 quarters also contributed to the increase.
SPECIAL CHARGES
As discussed under "Three Month Comparison" the Company recorded special
charges of approximately $126.9 million in the 1999 third quarter.
OPERATING INCOME (LOSS)
The 1999 nine month period produced an operating loss of $58.2 million
compared with the 1998 operating income of $65.7 million resulting primarily
from the write-off or write-down of certain software, intangibles related to
business acquisitions and restructuring, and other charges described above in
"Special charges". Before these charges, operating income for the first nine
months of 1999 decreased 1% compared with the first nine months of 1998. Also
before these charges, increases or decreases in segment operating income were:
property and casualty increased 11%, life and financial solutions increased 17%
and international decreased 40% (see discussion of "Revenues" and "Operating
Expenses" above).
OTHER INCOME AND EXPENSE
Other income and expense is comprised primarily of interest expense which
increased $5.3 million for the first nine months of 1999 compared with the first
nine months of 1998, principally due to higher levels of borrowed funds under
the Company's credit facility to finance business acquisitions and repurchases
of the Company's stock. The average nominal interest rate applicable to
borrowings under the Company's credit facility during the first nine months of
1999 was 5.4%.
INCOME TAXES
The effective income tax (benefit) rate (income taxes expressed as a
percentage of pre-tax income) on continuing operations including special charges
was 35.9% and 38.2% for the nine months ended September 30, 1999 and 1998,
respectively.
The effective income tax rate on continuing operations before special charges
was 36.0% for the nine months ended September 30, 1999. The effective income
tax rate decreased 2.3% for the first nine months of 1999 compared to the same
period in 1998, principally due to the effect of foreign income taxes from
operations in countries with tax rates lower than in the United States.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
- ---------------------------------------------------------
(Dollars in millions)
<S> <C> <C>
Cash and equivalents and marketable
securities. . . . . . . . . . . . $ 29.1 $ 26.0
Current assets. . . . . . . . . . . 251.0 217.2
Current liabilities . . . . . . . . 110.1 98.9
Working capital . . . . . . . . . . 140.9 118.3
Long-term debt. . . . . . . . . . . 202.0 85.0
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
- -----------------------------------------------------------------
(Dollars in millions)
<S> <C> <C>
Cash provided by operations. . . . . . . . . $ 59.3 $ 79.6
Cash (used) by investing activities. . . . . (150.0) (94.2)
Cash provided (used) by financing activities 93.6 (1.7)
</TABLE>
The Company's current ratio (current assets divided by current liabilities)
stood at 2.3 at September 30, 1999, which management believes is sufficient when
combined with available credit facilities to provide for day-to-day operating
needs and the flexibility to take advantage of investment opportunities. At
September 30, 1999, the Company had $240 million of committed and $20 million of
uncommitted credit facilities available to it, of which $230.4 million had been
utilized. On November 5, 1999 the Company entered into a new committed credit
facility of $70 million replacing $40 million of the $240 million bringing total
committed to $270 million. In addition, the Company reduced its uncommitted
facility to $5 million.
During the nine months ended September 30, 1999 the Company capitalized software
development costs of $50.5 million, principally related to the development of
its property and casualty, life and international enterprise software products
and claims, eCommerce and banking solutions.
Significant expenditures anticipated for the remainder of 1999, excluding any
possible business acquisitions or common stock repurchases, are as follows:
acquisition of computer and communications equipment, support software, 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, capital expenditures, 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.
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's operating results and financial condition may 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 and financial solutions industries. Significant
changes in the regulatory or market environment of these industries could impact
demand for the Company's software products and services. Additionally, there is
increasing competition for the Company's products and services, and there can be
no assurance that the Company's current products and services will remain
competitive, or that the Company's development efforts will produce products
with the cost and performance characteristics necessary to remain competitive.
Furthermore, the market for the Company's products and services is characterized
by rapid changes in technology and the emergence of the Internet as a viable
insurance distribution channel. In response to these changes the Company is
continually reassessing and challenging all major aspects of its business for
the purpose of evaluating whether it is correctly positioned to maximize its
potential. The Company's success will depend on the level of market acceptance
of the Company's products, technologies and enhancements, and its ability to
introduce such products, technologies and enhancements to the market on a timely
and cost effective basis, and maintain a labor force sufficiently skilled to
compete in the current environment.
The timing and amount of the Company's revenues are subject to a number of
factors, such as the timing of customers' decisions to enter into large license
agreements with the Company, which make estimation of operating results prior to
the end of a quarter or year extremely uncertain. Additionally, while management
believes that the Company's financing needs for the foreseeable future will be
satisfied from cash flows from operations and the Company's currently existing
credit facilities, unforeseen events or adverse economic or business trends may
significantly increase cash demands beyond those currently anticipated or affect
the Company's ability to generate/raise cash to satisfy financing needs.
A significant portion of both the Company's revenue and its operating income is
derived from initial licensing charges received as part of the Company's
software licensing activities. Because a substantial portion of these revenues
is recorded at the time new systems are licensed, there can be significant
fluctuations from period to period in the revenues and operating income derived
from licensing activities. This is attributable principally to the timing of
customers' decisions to enter into license agreements with the Company, which
the Company is unable to control. The Company believes that current and
potential customers' decisions to enter into license agreements with the Company
may be significantly affected by strategies to make their existing information
systems capable of handling the year 2000, however, at this time the Company is
unable to predict what the future impact, if any, will be. The Company's
licensing revenues have included significant amounts of right-to-use licenses
and the Company expects the occurrence of these licenses will be reduced in the
future.
<PAGE>
The increasing rate of change in the insurance and banking industries coupled
with the rapid evolution of eCommerce technology and the volatility of initial
licensing revenue is leading the Company to consider new business models that
place less emphasis on initial license revenue and more emphasis on transaction
based revenue. The Company expects this transition to occur gradually over the
next several years and will likely affect the amount and timing of revenue
recognized in the Company's financial statements.
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.
The following seven phases are included in the Company's Year 2000 project:
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 remediation requirements for each component in order of
business risk prioritization determined during Triage.
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. Subjecting customer products and internal systems that the Company
relies upon to support its business to tests designed to identify issues related
to date calculations, functions and routines that are affected by the Year 2000
change. Such tests include both system and integrated tests in environments
with machine dates advanced to dates in the years 1999 and 2000 ("Time Machine
Environment").
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
<PAGE>
taking care of residual activities. This phase also includes the compilation
and retention of supporting documentation that conforms to prescribed corporate
standards.
The Company has substantially completed all related tasks within the
project phases presented above. A small amount of product re-testing to
adequately address discrepancies identified during Time Machine testing remains.
These tests are expected to be completed in November. The Company will continue
to remediate products based on vendor compliance updates as they are released
and will continue to perform redundant tests on hardware and software until year
end.
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, into, and beyond the Year 2000. Tests performed on these
primary products have confirmed the ability of these applications to accurately
process data in both centuries. Additional testing on the Company's base
products was completed during the first half of 1999 in a Time Machine
Environment. This additional testing has sought to confirm that no
unanticipated problems will occur due to third party products with which the
Company's applications are designed to operate.
Service Offerings
- ------------------
The Company has completed Year 2000 application code remediation for
customers who will be Business Process Outsourcing ("BPO")/Information
Technology Outsourcing ("ITO Services") customers after December 31, 1999. Live
customer data that spans Year 2000 thresholds is currently, and has been,
successfully processed by these remediated applications in production
environments. Additionally, subsequent tests have been performed on customer
products and additional redundant testing will continue to occur in Year 2000
Time Machine Environments until year end 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, assessments, remediation, and testing
efforts in order to satisfy Year 2000 requirements. Redundant tests for Year
2000 compliance of the hardware and operating software in the Blythewood data
center will continue until year end.
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 Lockheed Martin. The Company's Australian and
European data centers have completed their inventory and assessment of hardware
and operating software for Year 2000 requirements. Finalization of the project
for all data centers is substantially complete.
<PAGE>
Re-tests of software will continue until year end 1999, as will the application
of upgrades to third party products when additional enhancements and fixes are
released.
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 financial components of the selected solution are
operational; however, only limited human resources functionality has been
implemented at this time. The human resources functionality of the legacy
systems that remain have been tested and verified to be Year 2000 ready.
The Company has inventoried, assessed and remediated its networks and PC
hardware and software as required. The Company has also completed assessment and
remediation of non-IT systems that 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"). Mission critical
suppliers and trading partners have been identified and tests of most of these
interfaces, to the extent practical, have been performed in a Year 2000
environment. The Company's ability to influence cooperation is partially
dependent on the significance of the Company's relationship with its suppliers
and trading partners and their willingness to share such information. The
Company has completed this phase of its Year 2000 readiness project.
Year 2000 Costs
- -----------------
Since 1993, the Company estimates that it has incurred approximately $21.3
million of costs in addressing Year 2000 remediation issues. These remediation
costs were funded by operations and the Company does not expect to incur any
additional costs for the remainder of the year.
Year 2000 Risks
- -----------------
The Company's products are designed to be used with and require the 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.
Furthermore, there is a general uncertainty inherent in the Year 2000 problem
stemming, in part, from the uncertainty of the Year 2000 readiness of
third-party suppliers and the Company's customers and prospective customers.
For these reasons, the Company is unable to determine at this time
<PAGE>
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 will continue to modify and finalize contingency and staffing plans
for worldwide coverage, as applicable, until year end.
Readers are cautioned that forward-looking statements contained in this
Year 2000 section should be read in conjunction with the Company's disclosures
under the heading "Factors That May Affect Future Results" above.
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 4, 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 filed a report under Item 5 Other Events on October 5, 1999
disclosing that it expected third quarter earnings to be in the range of $.31 to
$.36 per share before special and restructuring charges. 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: November 12, 1999 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 September 2, 1999
incorporating all amendments thereto subsequent to July 19, 1994 (filed
herewith)
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. 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)
B. 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)
C. 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)
D. 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)
E. 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)
F. 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)
G. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named
<PAGE>
executive officer (filed as an Exhibit to Form 10-Q for the quarter ended
September 30, 1992, and is incorporated herein by reference)
H. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1994, and
is incorporated herein by reference)
I. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is
incorporated herein by reference)
J. 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)
K. 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)
L. 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)
M. Second and Third Amendments to the Policy Management Systems Corporation
1989 Stock Option Plan (filed as an Exhibits and to Form 10-Q for the quarter
ended June 30, 1995, and is incorporated herein by reference)
N. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1995, and is
incorporated herein by reference)
O. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-K for year ended December 31, 1995, and is
incorporated herein by reference)
P. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-K for year ended December 31, 1995, and is
incorporated herein by reference)
Q. 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)
R. 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)
S. 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)
<PAGE>
T. 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)
U. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1996, and is
incorporated herein by reference)
V. Employment Agreement Form dated November 7, 1996 for Messrs.
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)
W. 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)
X. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each executive officer (filed
as an Exhibit to Form 10-Q for the quarter ended March 31, 1997 and is
incorporated herein by reference)
Y. Form of Amendment No. 1 to the Employment Agreements with Messrs.
Morrison and Williams, together with schedule identifying particulars for each
executive officer (filed as an Exhibit to Form 10Q for Quarter ended June 30,
1997 and is incorporated herein by reference)
Z. Form of Employment Agreements with Messrs. Wilson and Bailey, together
with schedule identifying particulars for each executive officer (filed as an
Exhibit to Form 10-Q for Quarter ending September 30, 1997 and is incorporated
herein by reference)
AA. 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 Quarter ending September 30, 1997 and is
incorporated herein by reference)
BB. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to the Form 10Q for the quarter ended March 31, 1998, and
is incorporated herein by reference)
CC. Policy Management Systems Corporation Restricted Stock Ownership Plan
(filed as an Exhibit to Form 10-Q for Quarter ended September 30, 1998 and is
incorporated herein by reference)
DD. Form of Restricted Stock Award Agreement dated August 11, 1998 with
Messrs. Berkeley, Feddersen, Palms, Sargent, Seibels and Trub (filed as an
Exhibit to Form 10-Q for Quarter ended September 30, 1998 and is incorporated
herein by reference)
<PAGE>
EE. Employment Agreement with Michael W. Risley dated February 23, 1999,
effective November 10, 1998 (filed as an Exhibit to Form 10-K for the year ended
December 31, 1998 and is incorporated herein by reference)
FF. Form of Restricted Stock Award Agreement dated March 1, 1999 with
Messrs. Berkeley, Feddersen, Palms, Sargent, Seibels and Trub (filed as an
Exhibit to Form 10-Q for Quarter ending March 31, 1999 and is incorporated
herein by reference)
GG. Form of Restricted Stock Award Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-Q for Quarter ending March 31, 1999 and is
incorporated herein by reference)
HH. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-Q for Quarter ending June 30, 1999 and is
incorporated herein by reference)
II. Stock Option/Non-Compete Form Agreement with Michael W. Risley dated May
11, 1999 (filed as an Exhibit to Form 10-Q for Quarter ending June 30, 1999 and
is incorporated herein by reference)
JJ. Form of 1999 Bonus Plan for named executive officers together with
schedule identifying particulars for each named executive officer (filed as an
Exhibit to Form 10-Q for Quarter ending June 30, 1999 and is incorporated herein
by reference)
KK. Promissory Note dated July 21, 1999 between Policy Management
Systems Corporation and First Union National Bank (filed herewith)
27. FINANCIAL DATA SCHEDULE
A. Filed herewith
AMENDED AND RESTATED BYLAWS
OF
POLICY MANAGEMENT SYSTEMS CORPORATION
SEPTEMBER 2, 1999
<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION
TABLE OF CONTENTS
-----------------
ARTICLE 1
OFFICES 1
Section 1: Registered Office and Agent 1
------------------------------
Section 2: Other Offices 1
--------------
ARTICLE 2
SHAREHOLDERS 1
Section 1: Place of Meetings 1
-------------------
Section 2: Annual Meetings 1
----------------
Section 3: Special Meetings 1
-----------------
Section 4: Notice 1
------
Section 5: Quorum 2
------
Section 6: Majority Vote; Withdrawal of Quorum 2
---------------------------------------
Section 7: Method of Voting 2
------------------
Section 8: Record Date 3
------------
Section 9: Shareholder Proposals 3
----------------------
ARTICLE 3
DIRECTORS 4
Section 1: Management 4
----------
Section 2: Number, Classification and Election of Directors 4
-----------------------------------------------------
Section 3: Election of Directors 4
-----------------------
Section 4: Nomination of Directors 4
-------------------------
Section 5: Removal of Directors 4
----------------------
Section 6: Vacancies 5
---------
Section 7: Place of Meetings 5
-------------------
Section 8: Regular Meetings 5
-----------------
Section 9: Special Meetings 5
-----------------
Section 10: Telephone and Similar Meetings 5
---------------------------------
Section 11: Quorum; Majority Vote 6
-----------------------
Section 12: Compensation 6
------------
Section 13: Procedure 6
---------
Section 14: Action Without Meeting 6
------------------------
ARTICLE 4
BOARD COMMITTEES 6
Section 1: Designation 6
-----------
<PAGE>
Section 2: Executive Committee 7
--------------------
Section 3: Audit Committee 7
----------------
Section 4: Nominating Committee 7
---------------------
Section 5: Compensation Committee 7
-----------------------
Section 6: Other Committees 7
-----------------
Section 7: Meetings 8
--------
Section 8: Quorum; Majority Vote 8
-----------------------
Section 9: Procedure 8
---------
Section 10: Action Without Meeting 8
------------------------
Section 11: Telephone and Similar Meetings 8
---------------------------------
ARTICLE 5
OFFICERS 8
Section 1: Offices 8
-------
Section 2: Term 9
----
Section 3: Vacancies . 9
---------
Section 4: Compensation 9
------------
Section 5: Removal 9
-------
Section 6: Chairman of the Board 9
------------------------
Section 7: Vice Chairman of the Board 9
------------------------------
Section 8: Chief Executive Officer 10
-------------------------
Section 9: President 10
---------
Section 10: Vice Presidents 10
----------------
Section 11: Secretary 10
---------
Section 12: Assistant Secretary 11
--------------------
Section 13: Treasurer 11
---------
Section 14: Assistant Treasurers 11
---------------------
Section 15: General Counsel 11
----------------
ARTICLE 6
CERTIFICATES AND SHAREHOLDERS 11
Section 1: Certificates 12
------------
Section 2: Issuance of Shares 12
--------------------
Section 3: Rights of Corporation with Respect to Registered Owners 12
----------------------------------------------------------
Section 4: Transfers of Shares 12
---------------------
Section 5: Registration of Transfer 12
--------------------------
Section 6: Lost, Stolen or Destroyed Certificates 13
------------------------------------------
Section 7: Restrictions on Shares 13
------------------------
Section 8: Control Share Acquisitions Statute 13
-------------------------------------
Section 9: Voting of Stock Held 13
-----------------------
ARTICLE 7
GENERAL PROVISIONS 14
<PAGE>
Section 1: Distributions 14
-------------
Section 2: Books and Records 14
-------------------
Section 3: Execution of Documents 14
------------------------
Section 4: Fiscal Year 14
------------
Section 5: Seal 14
----
Section 6: Resignation 14
-----------
Section 7: Computation of Days 15
---------------------
Section 8: Amendment of Bylaws 15
---------------------
Section 9: Construction 15
------------
Section 10: Headings 15
--------
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
POLICY MANAGEMENT SYSTEMS CORPORATION
SEPTEMBER 2, 1999
ARTICLE 1: OFFICES
Section 1: Registered Office and Agent. The registered office of the
------------------------------
Corporation and the registered agent shall be at One PMS Center, Blythewood,
South Carolina 29016.
Section 2: Other Offices. The Corporation may also have offices at such
--------------
other places within and without the State of South Carolina as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE 2: SHAREHOLDERS
Section 1: Place of Meetings. Meetings of shareholders shall be held at
------------------
the time and place, within or without the State of South Carolina, stated in the
notice of the meeting or in a waiver of notice.
Section 2: Annual Meetings. An annual meeting of the shareholders shall
----------------
be held each year on a date and at a time to be set by the Board of Directors in
accordance with all applicable notice requirements. At the meeting, the
shareholders shall elect directors and transact such other business as may
properly be brought before the meeting.
Section 3: Special Meetings.
-----------------
(a) Special meetings of the shareholders, for any purpose or purposes,
unless otherwise required by the South Carolina Business Corporation Act of
1988, as amended or any successor provisions thereof (the "Act"), the Articles
of Incorporation of the Corporation (the "Articles"), or these Bylaws, may be
called only by the chief executive officer, the president, the chairman of the
Board of Directors or a majority of the Board of Directors.
<PAGE>
(b) Business transacted at any special meeting shall be confined to the
specific purpose or purposes stated in the notice of the meeting.
Section 4: Notice.
------
<PAGE>
(a) Written or printed notice stating the place, day and hour of the meeting
and, in the case of a special meeting, the specific purpose or purposes for
which the meeting is called, shall be delivered by the Corporation not less than
ten nor more than sixty days before the date of the meeting, either personally
or by mail, to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed effective when deposited with postage
prepaid in the United States mail, addressed to the shareholder at the address
appearing on the stock transfer books of the Corporation. Except as may be
expressly provided by law, no failure or irregularity of notice of any regular
meeting shall invalidate the same or any proceeding thereat.
(b) The notice of each special shareholders meeting shall include a
description of the specific purpose or purposes for which the meeting is called.
Except as provided by law, the Articles or these Bylaws, the notice of an annual
shareholders meeting need not include a description of the purpose or purposes
for which the meeting is called.
Section 5: Quorum. The holders of a majority of the shares issued and
------
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall be requisite and shall constitute a quorum at meetings of the
shareholders for the transaction of business except as otherwise provided by
statute, by the Articles or these Bylaws. If a quorum is not present or
represented at a meeting of the shareholders, the shareholders entitled to vote,
present in person or represented by proxy, shall have the power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum is present or represented. At an adjourned meeting at
which a quorum is present or represented, any business may be transacted which
might have been transacted at the meeting as originally notified. Once a share
is represented for any purpose at a meeting it is deemed present for quorum
purposes.
Section 6: Majority Vote; Withdrawal of Quorum. Except in regards to the
-----------------------------------
election of directors, when a quorum is present at a meeting, the vote of the
holders of a majority of the shares having voting power, present in person or
represented by proxy, shall decide any question brought before the meeting,
unless the question is one on which, by express provision of the statutes, the
Articles or these Bylaws, a higher vote is required in which case the express
provision shall govern. Directors shall be elected by a plurality vote of the
shareholders. The shareholders present at a duly constituted meeting may
continue to transact business until adjournment, despite the withdrawal of
enough shareholders to leave less than a quorum.
Section 7: Method of Voting. Each outstanding share of common stock shall
----------------
be entitled to one vote on each matter submitted to a vote at a meeting of
shareholders. Each outstanding share of other classes of stock, if any, shall
have such voting rights as may be prescribed by the Board of Directors. Proxies
delivered by facsimile to the Corporation, if otherwise in order, shall be
valid. Votes shall be taken by voice, by hand or in writing, as
<PAGE>
directed by the chairman of the meeting. Voting for directors shall be in
accordance with Article 3, Section 3 of these Bylaws.
Section 8: Record Date. For the purpose of determining shareholders
------------
entitled to notice of or to vote at any meeting of shareholders, including any
special meeting, or shareholders entitled to receive payment of dividends, or in
order to make a determination of shareholders for any other purpose, the Board
of Directors may fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not less than ten nor
more than seventy days prior to the date on which the particular action,
requiring such determination of shareholders, is to be taken. Except as
otherwise provided by law, if no record date is fixed for the determination of
shareholders entitled to notice of or to vote at a meeting of shareholders, or
of shareholders entitled to receive payment of dividends, the date on which
notice of the meeting is mailed, or the date on which the resolution of the
Board of Directors declaring such dividend is adopted, as the case may be, shall
be the record date.
Section 9: Shareholder Proposals. To the extent required by applicable law, a
---------------------
shareholder may bring a proposal before an annual meeting of shareholders as set
forth in this Section 9. To be properly brought before an annual meeting of
shareholders, business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors; (b)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors; or (c) otherwise properly brought before the meeting by a
shareholder. In addition to any other applicable requirements, for business to
be properly brought before an annual meeting by a shareholder, the shareholder
must have given timely notice thereof in writing to the secretary of the
Corporation. To be timely, a shareholder's notice must be given, either by
personal delivery or by United States mail, postage prepaid, return receipt
requested to the secretary of the Corporation not later than ninety days in
advance of the annual meeting. A shareholder's notice to the secretary of the
Corporation shall set forth as to each matter the shareholder proposes to bring
before the annual meeting (a) a description of the business desired to be
brought before the annual meeting (including the specific proposal(s) to be
presented) and the reasons for conducting such business at the annual meeting;
(b) the name and record address of the shareholder proposing such business; (c)
the class and number of shares of the Corporation that are owned of record by
the shareholder as of the record date for the meeting, if such date has been
made publicly available, or as of a date within ten days of the effective date
of the notice by the shareholder if the record date has not been made publicly
available; (d) the class and number of shares of the Corporation that are held
beneficially, but not held of record, by the shareholder as of the record date
for the meeting, if such date has been made publicly available, or as of a date
within ten days of the effective date of the notice by the shareholder if the
record date has not been made publicly available; and (e) any interest of the
shareholder in such business. In the event that a shareholder attempts to bring
business before an annual meeting without complying with the provisions of this
Section 9, the chairman of the meeting shall declare to the meeting that the
business was not properly brought before the meeting in accordance with the
foregoing procedures, and such business shall not be transacted. The chairman
of any annual meeting, for
<PAGE>
good cause shown and with proper regard for the orderly conduct of business at
the meeting, may waive in whole or in part the operation of this Section 9.
ARTICLE 3: DIRECTORS
Section 1: Management. The business and affairs of the Corporation shall
----------
be managed by the Board of Directors who may exercise all such powers of the
Corporation and do all such lawful acts and things as are not by law, the
Articles or these Bylaws directed or required to be done or exercised by the
shareholders.
Section 2: Number, Classification and Election of Directors. The Board of
------------------------------------------------
Directors shall be limited to a maximum of sixteen directors, with the precise
number thereof to be fixed as the Board shall from time to time resolve. The
members of the Board of Directors need not be shareholders nor need they be
residents of any particular state. Subject to the Act, the directors shall be
classified in accordance with the Articles.
Section 3: Election of Directors. Directors shall be elected by a plurality
-----------------------
vote. Each shareholder entitled to vote at an election of directors shall be
entitled to cumulate his votes in accordance with the Act.
Section 4: Nomination of Directors. To the extent required by applicable
-----------------------
law, shareholders may nominate directors as set forth in this Section 4.
Nominations, other than those made by or on behalf of the Board of Directors of
the Corporation, shall be made in writing and shall be delivered either by
personal delivery or by United States mail, postage prepaid, return receipt
requested, to the secretary of the Corporation no later than (a) with respect to
an election to be held at an annual meeting of shareholders, ninety days in
advance of such meeting; and (b) with respect to an election to be held at a
special meeting of shareholders for the election of directors, the close of
business on the seventh day following the date on which notice of such meeting
is first given to shareholders. Each notice shall set forth: (a) the name and
address of the shareholder who intends to make the nomination and of the person
or persons to be nominated; (b) a representation that the shareholder is a
holder of record of stock of the Corporation entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice; (c) a description of all arrangements
or understandings between the shareholder and each nominee and any other person
or persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the shareholder; (d) such other information
regarding each nominee proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission, had the nominee been nominated, or intended
to be nominated, by the Board of Directors; and (e) the consent of each nominee
to serve as a director of the Corporation if so elected. The chairman of the
meeting may refuse to acknowledge the nomination of any person not made in
compliance with the foregoing procedure. The chairman of any such meeting, for
good cause shown and with proper regard for the orderly conduct of business at
the meeting, may waive in whole or in part the operation of this Section 4.
<PAGE>
Section 5: Removal of Directors.
----------------------
(a) Directors may be removed without cause by the affirmative vote of the
holders of a majority of the shares entitled to vote at an election of
directors, such vote being taken at a meeting of the shareholders called for
that purpose at which the holders of eighty percent (80%) of the shares entitled
to vote are present in person or represented by proxy. No amendment,
alteration, change or repeal of this subparagraph of Article 3, Section 5 may be
effected unless it is first approved by the affirmative vote of holders of not
less than eighty percent (80%) of each class of shares of the Corporation
entitled to vote thereon.
(b) Directors may be removed for cause by the affirmative vote of the
holders of a majority of the shares entitled to vote at an election of
directors, such vote being taken at a meeting of the shareholders called for
that purpose at which a quorum as provided in Article 2, Section 6 is present.
(c) No director who has been elected by cumulative voting may be removed if
the votes cast against his removal would be sufficient to elect him if then
cumulatively voted at an election of the entire Board of Directors, or, if there
be classes of directors, at an election of the class of Directors of which his
is a part.
Section 6: Vacancies. Any vacancy occurring in the Board of Directors,
---------
whether by increase in the number of directors or by death, resignation, removal
or otherwise may be filled by an affirmative vote of a majority of the remaining
directors then in office for a term ending at the next annual meeting of the
shareholders of the Corporation.
Section 7: Place of Meetings. Meetings of the Board of Directors, regular
-----------------
or special, may be held either within or without the State of South Carolina.
Section 8: Regular Meetings. Regular meetings of the Board of Directors
-----------------
may be held without notice at such time and place as shall from time to time be
determined by the Board.
Section 9: Special Meetings. Special meetings of the Board of Directors
-----------------
may be called by the chairman, the chief executive officer, the president or any
executive vice president, on not less than one hour's notice. Notice of a
special meeting may be given by personal notice, telephone, facsimile,
electronic communication, overnight courier or United States mail to each
director. Any such special meeting shall be held at such time and place as
shall be stated in the notice of the meeting. The notice need not describe the
purpose or purposes of the special meeting.
<PAGE>
Section 10: Telephone and Similar Meetings. Directors may participate in and
-------------------------------
hold a meeting by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other. Participation in such a meeting shall constitute presence in person
at the meeting, except where a person participates in the meeting for the
express purpose of objecting to the holding of the meeting or the transacting of
any business at the meeting on the ground that the meeting is not lawfully
called or convened, and does not thereafter vote for or assent to action taken
at the meeting.
Section 11: Quorum; Majority Vote. At meetings of the Board of Directors
---------------------
a majority of the number of directors then in office shall constitute a quorum
for the transaction of business. The act of a majority of the directors present
at a meeting at which a quorum is present shall be the act of the Board of
Directors, except as otherwise specifically provided by law, the Articles or
these Bylaws. If a quorum is not present at a meeting of the Board of
Directors, the directors present may adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum is
present.
<PAGE>
Section 12: Compensation. Each director shall be entitled to receive such
------------
reasonable compensation as may be determined by resolution of the Board of
Directors. By resolution of the Board of Directors, the directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of the Executive Committee, Audit Committee, other standing committees and
special committees may, by resolution of the Board of Directors, be allowed
compensation for attending committee meetings.
Section 13: Procedure. The Board of Directors shall keep regular minutes
---------
of its proceedings. The minutes shall be placed in the minute book of the
Corporation.
Section 14: Action Without Meeting. Any action required or permitted to
-----------------------
be taken at a meeting of the Board of Directors may be taken without a meeting
by unanimous written consent of all the directors. Such consent shall have the
same force and effect as a meeting vote and may be described as such in any
document.
ARTICLE 4: BOARD COMMITTEES
Section 1: Designation. The Board of Directors may, by resolution adopted
-----------
by a majority of the full Board, designate an Executive Committee, an Audit
Committee, a Nominating Committee, a Compensation Committee and other
committees. Each committee must have two or more members who serve at the
pleasure of the Board of Directors. To the extent specified by the Board of
Directors, in the Articles or in these Bylaws, each committee may exercise the
authority of the Board of Directors. So long as prohibited by law, however, a
committee of the Board may not (a) authorize distributions; (b) approve or
propose to shareholders action required
<PAGE>
by the Act to be approved by shareholders; (c) fill vacancies on the Board of
Directors or on any of its committees; (d) amend the Articles; (e) adopt, amend
or repeal these Bylaws; (f) approve a plan of merger not requiring shareholder
approval; (g) authorize or approve reacquisition of shares, except according to
a formula or method prescribed by the Board of Directors; or (h) authorize or
approve the issuance or sale or contract for sale of shares, or determine the
designation and relative rights, preferences and limitations of a class or
series of shares, except that the Board of Directors may authorize a committee
(or a senior executive officer of the Corporation) to do so within limits
specifically prescribed by the Board of Directors.
Section 2: Executive Committee. The Executive Committee shall consist of
-------------------
two or more directors elected by the Board, one of whom shall be the chief
executive officer of the Corporation. When the Board of Directors is not in
session, the Executive Committee, to the extent permitted by applicable law,
shall have and may exercise all of the authority of the Board of Directors in
the management of the business and affairs of the Corporation.
Section 3: Audit Committee. The Audit Committee shall consist of three or more
---------------
directors elected by the Board, none of whom shall be employed by the
Corporation in any capacity other than as directors, the chairman of which shall
be appointed by the chief executive officer. The Audit Committee shall select
and nominate for consideration of the Board of Directors independent auditors of
the Corporation, shall be responsible for the arrangements for the scope of the
independent examination of the financial records of the Corporation by such
auditors, shall give appropriate consideration to the controls of such audit and
shall perform such other duties and assume such additional responsibility as may
from time to time be placed upon it by the Board of Directors.
Section 4: Nominating Committee. The Nominating Committee shall consist
---------------------
of two or more directors elected by the Board. The Nominating Committee shall
nominate for consideration of the Board of Directors candidates for director,
president, secretary, treasurer, general counsel, and, if so directed by the
Board, chief executive officer. The nominating committee shall, if so directed
by the Board, nominate for consideration of the Board of Directors candidates
for the other offices and non-officer positions the Board has the power to
appoint. The Nominating Committee shall perform such other duties and assume
such additional responsibility as may from time to time be placed upon it by the
Board of Directors.
Section 5: Compensation Committee. The Compensation Committee shall
-----------------------
consist of two or more directors elected by the Board. The Compensation
Committee shall be responsible for the overall administration of all matters
pertaining to compensation of the officers and employees of the Corporation.
The committee shall give appropriate consideration to any salary administration
plan or bonus plan which may from time to time be proposed or adopted by the
Corporation. The Compensation Committee shall perform such other duties and
assume such additional responsibility as may be placed upon it by the Board of
Directors.
<PAGE>
Section 6: Other Committees. The Board of Directors may appoint such other
-----------------
committees as it deems appropriate, each consisting of two or more directors.
Any director may serve on any such other committee. Any committee appointed
under this Section 6 shall perform such duties and assume such responsibility as
may from time to time be placed upon it by the Board of Directors.
Section 7: Meetings. Time, place and notice of Executive, Audit,
--------
Nominating, Compensation and other committee meetings shall be as called and
specified by the chief executive officer, the committee chairman or any two
members of each committee.
<PAGE>
Section 8: Quorum; Majority Vote. At meetings of the Executive, Audit,
-----------------------
Nominating, Compensation and other committees, a majority of the number of
members designated by the Board of Directors shall constitute a quorum for the
transaction of business. The act of a majority of the members present at any
meeting at which a quorum is present shall be the act of the Executive, Audit,
Nominating, Compensation and other committees, except as otherwise specifically
provided by the Act, the Articles or these Bylaws. If a quorum is not present
at a meeting of the Executive, Audit, Nominating, Compensation or other
committees, the members present may adjourn the meeting from time to time,
without notice other than an announcement at the meeting, until a quorum is
present.
Section 9: Procedure. The Executive, Audit, Nominating, Compensation and
---------
other committees shall keep regular minutes of their proceedings and report the
same to the Board of Directors at its next regular meeting. The minutes of the
proceedings of the Executive, Audit, Nomination, Compensation and other
committees shall be placed in the minute book of the Corporation.
Section 10: Action Without Meeting. Any action required or permitted to
-----------------------
be taken at a meeting of the Executive, Audit, Nominating, Compensation or other
committees may be taken without a meeting by unanimous written consent of all
the members of the respective committee. Such consent shall have the same force
and effect as a meeting vote and may be described as such in any document.
Section 11: Telephone and Similar Meetings. Executive, Audit, Nominating,
------------------------------
Compensation and other committee members may participate in and hold a meeting
by means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other.
Participation in such a meeting shall constitute presence in person at the
meeting, except where a person participates in the meeting for the express
purpose of objecting to the holding of the meeting or the transacting of any
business at the meeting on the ground that the meeting is not lawfully called or
convened, and does not thereafter vote for or assent to action taken at the
meeting.
ARTICLE 5: OFFICERS
<PAGE>
Section 1: Offices. The officers of the Corporation shall consist of a
-------
president (who in the absence of a separately appointed chief executive officer
shall also hold the office of chief executive officer), a secretary, a
treasurer, and a general counsel, and if elected, a chairman of the board and
vice chairman of the board, and, if appointed, a chief executive officer
separate from the president, one or more executive vice presidents, one or more
senior vice presidents, one or more vice presidents, one or more assistant
secretaries, and one or more assistant treasurers. The Board of Directors may
also create and establish other officer positions or non-officer positions as it
deems appropriate. The Board of Directors shall have the authority to appoint,
or may authorize the chief executive officer to appoint or authorize specified
officers to appoint, the persons who shall hold such offices specified herein
and such other offices and non-officer positions as may be established by the
Board. The Board of Directors may also elect a chairman of the board and a vice
chairman of the board from among its members. Any two or more offices may be
held by the same person.
Section 2: Term. Each officer shall serve at the pleasure of the Board of
----
Directors (or, if appointed by an officer of the Corporation pursuant to this
Article, at the pleasure of the Board of Directors, the chief executive officer,
and/or such other officer who is authorized to appoint the officer) until his or
her death, resignation, or removal, or until his or her replacement is elected
or appointed in accordance with this Article.
Section 3: Vacancies. Any vacancy occurring in any office of the
---------
Corporation may be filled by the Board of Directors. Any vacancy in an office
that was filled by the chief executive officer or other authorized officer may
also be filled by the chief executive officer or by such other officer who is
authorized to fill such office.
Section 4: Compensation. The compensation of all officers of the
------------
Corporation shall be fixed by the Board of Directors or by a committee or
officer appointed by the Board of Directors. Officers may serve without
compensation.
Section 5: Removal. All officers (regardless of how elected or appointed)
-------
may be removed, with or without cause, by the Board of Directors. Any officer
appointed by the chief executive officer or another officer may also be removed,
with or without cause, by the chief executive officer or by any officer
authorized to appoint the officer to be removed. Removal will be without
prejudice to the contract rights, if any, of the person removed, but shall be
effective notwithstanding any damage claim that may result from infringement of
such contract rights.
Section 6: Chairman of the Board. The office of the chairman of the board
---------------------
may be filled by the Board at its pleasure by the election of one of its members
to the office. The chairman shall preside at all meetings of the Board, and
shall perform such other duties as may be assigned to him by the Board of
Directors.
<PAGE>
Section 7: Vice Chairman of the Board. The office of vice chairman of the
------------------------------
board may be filled by the Board at its pleasure by the election of one of its
members to the office. In the absence of the chairman of the board or in the
event that that office is vacant either temporarily or otherwise, during such
period the vice chairman shall assume the duties of the office of the chairman
of the board.
Section 8: Chief Executive Officer. If the Board chooses to have a chief
-----------------------
executive officer other than the president, the position of chief executive
officer may be filled by the Board at its pleasure. The chief executive officer
shall be responsible for the general and active management of the business and
affairs of the Corporation, and shall see that all orders and resolutions of the
Board are carried into effect. The chief executive officer shall preside at all
meetings of the shareholders. He shall perform such other duties and have such
other authority and powers as the Board of Directors may from time to time
prescribe.
Section 9: President. In the event no other person is designated the
---------
chief executive officer of the Corporation, or in the event that office is
vacant either temporarily or otherwise, during such period the president shall
serve as chief executive officer and have the duties of that office. He shall
perform such other duties and have such other authority and powers as the Board
of Directors may from time to time prescribe.
Section 10: Vice Presidents. The vice presidents (including the executive
---------------
and senior vice presidents), as such officers are appointed, with the executive
vice presidents being the most senior, and the senior vice presidents being next
senior, in the order of their seniority (based initially on title and then on
original time of appointment), unless otherwise determined by the Board of
Directors, shall, in the absence or disability of the president, perform the
duties and have the authority and exercise the powers of the president. They
shall perform such other duties and have such other authority and powers that
may from time to time be prescribed by the Board of Directors or delegated by an
authorized officer.
Section 11: Secretary.
---------
(a) The secretary shall attend all meetings of the Board of Directors and
all meetings of the shareholders and record all votes, actions and the minutes
of all proceedings in a book to be kept for that purpose and shall perform like
duties for the executive and other committees when required.
(b) He shall give, or cause to be given, notice of all meetings of the
shareholders and special meetings of the Board of Directors.
(c) He shall keep in safe custody the seal of the Corporation and, when
authorized by the Board of Directors or the Executive Committee, affix it to any
instrument requiring it. When so affixed, it shall be attested by his signature
or by the signature of the treasurer or an assistant secretary.
<PAGE>
(d) He shall be under the supervision of the president. He shall perform
such other duties and have such other authority and powers as may from time to
time be prescribed by the Board of Directors or delegated by an authorized
officer.
Section 12: Assistant Secretary. The assistant secretaries, as such
--------------------
officers are appointed, in the order of their seniority (based on original time
of appointment), unless otherwise determined by the Board of Directors, shall,
in the absence or disability of the secretary, perform the duties and have the
authority and exercise the powers of the secretary. They shall perform such
other duties and have such other powers as may from time to time be prescribed
by the Board of Directors or delegated by an authorized officer.
Section 13: Treasurer.
---------
(a) The treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements of the Corporation and shall deposit all moneys and other
valuables in the name and to the credit of the Corporation in appropriate
depositories.
(b) He shall disburse the funds of the Corporation ordered by the Board of
Directors, and prepare financial statements as they direct.
(c) He shall perform such other duties and have such other authority and
powers as may from time to time be prescribed by the Board of Directors or
delegated by an authorized officer.
(d) His books and accounts shall be opened at any time during business hours
to the inspection of any directors of the Corporation.
Section 14: Assistant Treasurers. The assistant treasurers, as such
---------------------
officers are appointed, in the order of their seniority (based on original time
of appointment), unless otherwise determined by the Board of Directors, shall in
the absence or disability of the treasurer, perform the duties and have the
authority and exercise the powers of treasurer. They shall perform such other
duties and have such other powers as may from time to time be prescribed by the
Board of Directors or delegated by an authorized officer.
Section 15: General Counsel. The general counsel of the Corporation shall
---------------
be responsible for the administration of the legal affairs of the Corporation.
He shall perform such other duties and have such other powers as may from time
to time be prescribed by the Board of Directors or delegated by an authorized
officer.
<PAGE>
ARTICLE 6: CERTIFICATES AND SHAREHOLDERS
Section 1: Certificates. Certificates in the form determined by the Board
------------
of Directors shall be delivered representing all shares of which shareholders
are entitled. Certificates shall be consecutively numbered and shall be entered
in the books of the Corporation as they are issued. At a minimum, each share
certificate must state on its face: (a) the name of the Corporation and that it
is organized under the laws of South Carolina; (b) the name of the person to
whom issued; and (c) the number and class of shares and the designation of the
series, if any, the certificate represents. Each share certificate (a) must be
signed (either manually or in facsimile) by at least two officers, including the
president, a vice president or such other officer or officers as the Board of
Directors shall designate; and (b) may bear the corporate seal or its facsimile.
If the person who signed (either manually or in facsimile) a share certificate
no longer holds office when the certificate is issued, the certificate is
nevertheless valid.
Section 2: Issuance of Shares. The Board of Directors may authorize
--------------------
shares to be issued for consideration consisting of any tangible or intangible
property or benefit to the Corporation, including cash, promissory notes,
services performed, written contracts for services to be performed or other
securities of the Corporation. Before the Corporation issues shares, the Board
of Directors must determine that the consideration received or to be received
for shares to be issued is adequate. That determination by the Board of
Directors is conclusive insofar as the adequacy of consideration for the
issuance of shares relates to whether the shares are validly issued, fully paid
and nonassessable. When the Corporation receives the consideration for which
the Board of Directors authorized the issuance of shares, the shares issued
therefor are fully paid and nonassessable.
Section 3: Rights of Corporation with Respect to Registered Owners. Prior
-------------------------------------------------------
to due presentation for transfer of registration of its shares, the Corporation
may treat the registered owner of the shares as the person exclusively entitled
to vote the shares, to receive any dividend or other distribution with respect
to the shares, and for all other purposes; and the Corporation shall not be
bound to recognize any equitable or other claim to or interest in the shares on
the part of any other person, whether or not it has express or other notice of
such a claim or interest, except as otherwise provided by law.
Section 4: Transfers of Shares. Transfers of shares shall be made upon
---------------------
the books of the Corporation kept by the Corporation or by the transfer agent
designated to transfer the shares, only upon direction of the person named in
the certificate or by an attorney lawfully constituted in writing. Before a new
certificate is issued, the old certificate shall be surrendered for cancellation
or, in the case of a certificate alleged to have been lost, stolen or destroyed,
the provisions of these Bylaws shall have been complied with.
Section 5: Registration of Transfer. The Corporation shall register the
-------------------------
transfer of a certificate for shares presented to it for transfer if: (a) the
certificate is properly endorsed by the registered owner or by his duly
authorized attorney; (b) the signature of such person has been
<PAGE>
guaranteed by a commercial bank or brokerage firm that is a member of the
National Association of Securities Dealers and reasonable assurance is given
that such endorsements are effective; (c) the Corporation has no notice of an
adverse claim or has discharged any duty to inquire into such a claim; (d) any
applicable law relating to the collection of taxes has been complied with; and
(e) the transfer is in compliance with applicable provisions of any transfer
restrictions of which the Corporation shall have notice.
Section 6: Lost, Stolen or Destroyed Certificates. The Corporation shall
--------------------------------------
issue a new certificate in place of any certificate for shares previously issued
if the registered owner of the certificate: (a) makes proof in affidavit form
that the certificate has been lost, destroyed or wrongfully taken; (b) requests
the issuance of a new certificate before the Corporation has notice that the
certificate has been acquired by a purchaser for value in good faith and without
notice of an adverse claim; (c) gives a bond in such form, and with such surety
or sureties, with fixed or open penalty, as the Corporation may direct, to
indemnify the Corporation (and its transfer agent and registrar, if any) against
any claim that may be made on account of the alleged loss, destruction or theft
of the certificate; and (d) satisfies any other reasonable requirements imposed
by the Corporation. When a certificate has been lost, apparently destroyed or
wrongfully taken, and the holder of record fails to notify the Corporation
within a reasonable time after he has notice of it, and the Corporation
registers a transfer of the shares represented by the certificate before
receiving such notification, the holder of record is precluded from making any
claim against the Corporation for the transfer or for a new certificate.
Section 7: Restrictions on Shares. The Board of Directors, on behalf of
-----------------------
the Corporation, or the shareholders may impose restrictions on the transfer of
shares (including any security convertible into, or carrying a right to
subscribe for or acquire shares) to the maximum extent permitted by law. A
restriction does not affect shares issued before the restriction was adopted
unless the holders of the shares are parties to the restriction agreement or
voted in favor of the restriction. A restriction on the transfer of shares is
valid and enforceable against the holder or a transferee of the holder if the
restriction is authorized by this Section 7 and its existence is noted
conspicuously on the front or back of the certificate.
Section 8: Control Share Acquisitions Statute. The Corporation elects not
----------------------------------
to be subject to or governed by the South Carolina Control Share Acquisitions
Statute contained in Sections 35-2-101 to 35-2-111 of the South Carolina Code,
or any amended or successor provisions thereof.
Section 9: Voting of Stock Held. Unless otherwise provided by resolution
--------------------
of the Board of Directors or of the Executive Committee, the president or any
executive vice president shall from time to time appoint an attorney or
attorneys or agent or agents of this Corporation, in the name and on behalf of
this Corporation, to cast the vote which this Corporation may be entitled to
cast as a shareholder or otherwise in any other corporation, any of whose stock
or securities may be held by this Corporation, at meetings of the holders of the
stock or other securities of such other corporation, or to consent in writing to
any action by any of such other corporation, and
<PAGE>
shall instruct the person or persons so appointed as to the manner of casting
such votes or giving such consent and may execute or cause to be executed on
behalf of this Corporation and under its corporate seal or otherwise, such
written proxies, consents, waivers or other instruments as may be necessary or
proper; or, in lieu of such appointment, the president or any executive vice
president may attend in person any meetings of the holders of stock or other
securities of any such other corporation and their vote or exercise any or all
power of this Corporation as the holder of such stock or other securities of
such other corporation.
ARTICLE 7: GENERAL PROVISIONS
Section 1: Distributions. The Board of Directors may authorize, and the
-------------
Corporation may make, distributions (including dividends on its outstanding
shares) in the manner and upon the terms and conditions provided by applicable
law and the Articles.
<PAGE>
Section 2: Books and Records. The Corporation shall keep correct and
-------------------
complete books and records of account and shall keep minutes of the proceedings
of its shareholders and Board of Directors.
Section 3: Execution of Documents. The Board of Directors or these Bylaws
----------------------
shall designate the officers, employees and agents of the Corporation who shall
have the power to execute and deliver deeds, contracts, mortgages, bonds,
debentures, checks and other documents for and in the name of the Corporation,
and may authorize such officers, employees and agents to delegate such power
(including authority to redelegate) to other officers, employees or agents of
the Corporation. Unless so designated or expressly authorized by these Bylaws,
no officer, employee or agent shall have any power or authority to bind the
Corporation by any contract or engagement or to pledge its credit or to render
it liable pecuniarily for any purpose or any amount.
Section 4: Fiscal Year. The fiscal year of the Corporation shall be the
------------
same as the calendar year.
Section 5: Seal. The Corporation's seal shall contain the name of the
----
Corporation and the name of the state of incorporation. The seal may be used by
impressing it or reproducing a facsimile of it or otherwise.
Section 6: Resignation. A director may resign by delivering written
-----------
notice to the Board of Directors, the chairman or the Corporation. Such
resignation of a director is effective when the notice is delivered unless the
notice specifies a later effective date. An officer may resign at any time by
delivering notice to the Corporation. Such resignation of an officer is
effective when the notice is delivered unless the notice specifies a later
effective date. If a resignation of an officer is made effective at a later
date and the Corporation accepts the future effective date, the pending vacancy
may be filled before the effective date if it is provided that the successor
does not take office until the effective date.
<PAGE>
Section 7: Computation of Days. In computing any period of days
---------------------
prescribed hereunder the day of the act after which the designated period of
days begins to run is not to be included. The last day of the period so
computed is to be included.
Section 8: Amendment of Bylaws.
---------------------
(a) These Bylaws may be altered, amended or repealed or new Bylaws may be
adopted at any meeting of the Board of Directors at which a quorum is present,
by a two-thirds (2/3) vote of the directors then in office, provided notice of
the proposed alteration, amendment or repeal is contained in the notice of the
meeting.
(b) These Bylaws may also be altered, amended or repealed or new Bylaws may
be adopted at any meeting of the shareholders at which a quorum is present or
represented by proxy, by the affirmative vote of the holders of sixty-six and
two-thirds (66-2/3%) percent of each class of shares entitled to vote thereon,
provided notice of the proposed alteration, amendment or repeal is contained in
the notice of the meeting.
(c) Upon adoption of any new bylaw by the shareholders, the shareholders may
provide expressly that the Board of Directors may not adopt, amend or repeal
that bylaw or any bylaw on that subject.
Section 9: Construction. Whenever the context so requires, the masculine
------------
shall include the feminine and neuter, and the singular shall include the
plural, and conversely. If any portion of these Bylaws shall be invalid or
inoperative, then, so far as is reasonable and possible: (a) the remainder of
these Bylaws shall be considered valid and operative, and (b) effect shall be
given to the intent manifested by the portion held invalid or inoperative.
Section 10: Headings. The headings are for convenience of reference only
--------
and shall not affect in any way the meaning or interpretation of these Bylaws.
PROMISSORY NOTE
$40,000,000 July 21, 1999
FOR VALUE RECEIVED, POLICY MANAGEMENT SYSTEMS CORPORATION, a South Carolina
corporation, and any other makers who from time to time execute a duplicate
signature page for delivery to the Bank (collectively, the "Borrower"), each
jointly and severally promises to pay to the order of FIRST UNION NATIONAL BANK,
a national banking association (the "Bank"), at the location of 201 College
Street, Charlotte, North Carolina 28288, or such other place as Bank may
designate in writing, the principal sum of Forty Million and No/00 Dollars
($40,000,000.00), or so much thereof as may be advanced under the terms and
conditions of this Promissory Note (including all renewals, extensions, or
modifications hereof, this "Note"), together with interest on the unpaid
principal balance from the date hereof, until paid, at a rate of interest per
annum equal to the LIBOR Market Interest Rate plus one-half percent (.50%) as
that rate may change from day to day in accordance with changes in the LIBOR
Market Interest Rate ("Interest"). For purposes hereof, "LIBOR Market Interest
Rate" for any day is the rate for one month U.S. Dollar deposits as reported on
Telerate Page 3750 as of 11:00 a.m. London time on such day, or if such day is
not a London business day, then the immediately preceding London business day
(or if not so reported, then as determined by Bank from another recognized
source or interbank quotation). The Bank's determination of such rate shall be
conclusive, absent manifest error. Provided no Default (as later defined) has
occurred, and provided the balance outstanding under the Note is not due and
payable by its terms, the Borrower may borrow and repay up to the maximum amount
of this Note on a revolving basis.
Interest accruing under this Note shall be paid monthly beginning August 1,
1999 and continuing on the same day of each calendar month thereafter until all
outstanding principal and interest is paid in full. This Note shall be payable
in full on the earlier of: (i) October 15, 1999, or (ii) the date the private
placement of debt on behalf of Borrower offered by Wachovia Bank, N.A. and
co-agented by Bank in the amount of $40,000,000 to $100,000,000 is closed.
Interest shall be computed on the basis of a 360-day year for the actual number
of days in the interest period ("Actual/360 Computation"). The Actual/360
Computation determines the annual effective interest yield by taking the stated
(nominal) interest rate for a year's period and then dividing said rate by 360
to determine the daily periodic rate to be applied for each day in the interest
period. Application of the Actual/360 Computation produces an annualized
effective interest rate exceeding that of the nominal rate.
The undersigned promises to pay to Bank or order, a late fee in the amount
of four percent (4%) of any installment past due for fifteen (15) or more days.
In addition, if payment of all sums due hereunder is accelerated under the terms
of the Note, the then remaining principal amount and accrued but unpaid interest
hereunder shall bear interest at a rate equal to the Prime Rate plus five
percent (5%) per annum until such principal and interest have been paid in full.
"Prime Rate" means the rate of interest per annum announced by Bank from time to
time to be its prime rate. The banks makes loans using indices other than the
Prime Rate and at rates above and below the Prime Rate.
<PAGE>
No delay or omission on the part of the Bank or other holder in exercising
any right hereunder shall operate as a waiver of such right or of any other
right of such holder, nor shall any delay, omission or waiver on any one
occasion be deemed a bar to or waiver of the same or any other right on any
future occasion. Every one of the undersigned and every endorser or guarantor
of this Note regardless of the time, order or place of signing waives
presentment, demand, protest and notices of every kind and assents to any one or
more extensions or postponements of the time of payment or any other
indulgences, to any substitutions, exchanges or releases of collateral if any
time there be available to the holder collateral for this Note, and to the
additions or releases of any other parties or persons primarily or secondarily
liable.
The following shall constitute an Event of Default hereunder: (i) in the
event any default is made in the payment of principal or interest as stipulated
above; (ii) Borrower files or has filed against it an insolvency or bankruptcy
proceeding and if an involuntary proceeding, such proceeding remains undismissed
or unstayed for sixty (60) or more days; (iii) failure to pay any other
indebtedness when due; (iv) any default in payment or performance of any
obligation, term or covenant of Borrower under the terms of the certain Credit
Agreement (the "Credit Agreement") dated August 8, 1997 by and among Borrower,
the Guarantors Party thereto (including, without limitation, Cybertek
Corporation, Policy Management Systems Investments, Inc., PMSI, L.P., and
Cybertek Solutions, L.P. and each other Person who has executed the Credit
Agreement as a guarantor), Bank of America National Trust and Savings
Association, as Agent, and the Other Financial Institutions Party Thereto.
Notwithstanding the above, any cure or grace period given the Borrower in the
Credit Agreement for the Events of Default described in Section (ii) and (iii)
above shall also apply to the provisions in Section (ii) and (iii) above. Upon
the occurrence of an Event of Default, the entire outstanding principal balance
of the indebtedness evidenced hereby, together with any other sums advanced
hereunder and/or under any other instrument or document now or hereafter
evidencing, securing or in any way relating to the indebtedness evidenced
hereby, together with all unpaid interest accrued thereon, shall, at the option
of Bank and upon notice to Borrower, at once become due and payable and may be
collected forthwith, regardless of the stipulated date of maturity. In
addition, upon an Event of Default, the balance due hereunder may be charged
against any obligation of the Bank to any party, including endorsers, sureties
or guarantors to this instrument.
Except as to Liens permitted by the terms of the Credit Agreement, Borrower
shall not incur, create, assume, or permit to exist any Lien, of any kind upon
any of its respective properties or assets of any character until this Note is
paid in full. The term "Liens" shall have the meaning given in the Credit
Agreement. The representations, warranties and covenants of the Borrower
contained in the Credit Agreement, including, without limitation, those
contained in Articles 4 and 5 of the Credit Agreement, are incorporated herein
and reaffirmed as true and correct and binding on the Borrower on the date
hereof. These representations, warranties and covenants are made by Borrower to
Bank as a material inducement to extend the credit evidenced by this Note.
If this Note is placed with an attorney for collection, the undersigned
agrees to pay all costs of collection, including but not limited to reasonable
attorneys' fees.
All agreements herein made are expressly limited so that in no event
whatsoever, whether by reason of advancement of proceeds hereof, acceleration of
maturity of the unpaid balance
<PAGE>
hereof or otherwise, shall the amount paid or agreed to be paid to Bank for the
use of the money advanced or to be advanced hereunder exceed the maximum rate of
interest allowed to be charged under applicable law (the "Maximum Legal Rate").
If, from any circumstances whatsoever, the fulfillment of any provision of this
Note or any other agreement or instrument now or hereafter evidencing, securing
or in any way relating to the indebtedness evidenced hereby shall involve the
payment of interest in excess of the Maximum Legal Rate, then, ipso facto, the
obligation to pay interest hereunder shall be reduced to the Maximum Legal Rate;
and if from any circumstance whatsoever, Bank shall ever receive interest, the
amount of which would exceed the amount collectible at the Maximum Legal Rate,
such amount as would be excessive interest shall be applied to the reduction of
the principal balance remaining unpaid hereunder and not to the payment of
interest. This provision shall control every other provision in any and all
other agreements and instruments existing or hereafter arising between Borrower
and Bank with respect to the indebtedness evidenced hereby.
Upon demand of any party hereto, whether made before or after institution
of any judicial proceeding, any claim or controversy arising out of or relating
to the Note between parties hereto (a "Dispute") shall be resolved by binding
arbitration conducted under and governed by the Commercial Financial Disputes
Arbitration Rules (the "Arbitration Rules") of the American Arbitration
Association (the "AAA") and the Federal Arbitration Act. Disputes may include,
without limitation, tort claims, counterclaims, a dispute as to whether a matter
is subject to arbitration, claims brought as class actions, or claims arising
from documents executed in the future. A judgment upon the award may be entered
in any court having jurisdiction. Notwithstanding the foregoing, this
arbitration provision does not apply to disputes under or related to swap
agreements.
All arbitration hearings shall be conducted in the city named in the
address of Bank first stated above. A hearing shall begin within 90 days of
demand for arbitration and all hearings shall conclude within 120 days of demand
for arbitration. These time limitations may not be extended unless a party
shows cause for extension and then for no more than a total of 60 days. The
expedited procedures set forth in Rule 51 et seq. of the Arbitration Rules shall
be applicable to claims of less than $1,000,000.00. Arbitrators shall be
licensed attorneys selected from the Commercial Financial Dispute Arbitration
Panel of the AAA. The parties do not waive applicable Federal or state
substantive law except as provided herein.
Notwithstanding the preceding binding arbitration provisions, the parties
agree to preserve, without diminution, certain remedies that any party may
exercise before or after an arbitration proceeding is brought. The parties
shall have the right to proceed in any court of proper jurisdiction or by
self-help to exercise or prosecute the following remedies, as applicable: (i)
all rights to foreclose against any real or personal property or other security
by exercising a power of sale or under applicable law by judicial foreclosure
including a proceeding to confirm the sale; (ii) all rights of self-help
including peaceful occupation of real property and collection of rents, set-off,
and peaceful possession of personal property; (iii) obtaining provisional or
ancillary remedies including injunctive relief, sequestration, garnishment,
attachment, appointment of receiver and filing an involuntary bankruptcy
proceeding; and (iv) when applicable, a judgment by confession of judgment. Any
claim or controversy with regard to any party's entitlement to such remedies is
a Dispute.
<PAGE>
The parties agree that they shall not have a remedy of punitive or
exemplary damages against other parties in any Dispute and hereby waive any
right or claim to punitive or exemplary damages they have now or which may arise
in the future in connection with any Dispute whether the Dispute is resolved by
arbitration or judicially.
THE PARTIES ACKNOWLEDGE THAT BY AGREEING TO BINDING ARBITRATION THEY HAVE
IRREVOCABLY WAIVED ANY RIGHT THEY MAY HAVE TO JURY TRIAL WITH REGARD TO A
DISPUTE.
All rights and obligations hereunder shall be governed by the laws of the
State of South Carolina.
At the time of the execution of this Note, the Borrower shall pay the Bank
a non-refundable fee equal to $20,000.
IN WITNESS WHEREOF, the Borrower has caused this Note to be executed under
seal in its name by its duly authorized officer, and its seal affixed, as of the
date first above written, and pursuant to authority duly granted.
POLICY MANAGEMENT SYSTEMS
CORPORATION, a South Carolina corporation
By: /s/ G. Larry Wilson
----------------------
Its President
Attest
By: /s/ Lynn W. Dillard
----------------------
Title: Assistant Secretary
--------------------
[CORPORATE SEAL]
<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,
1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 28877
<SECURITIES> 228
<RECEIVABLES> 142978
<ALLOWANCES> 2437
<INVENTORY> 0
<CURRENT-ASSETS> 250973
<PP&E> 270005
<DEPRECIATION> 126307
<TOTAL-ASSETS> 752270
<CURRENT-LIABILITIES> 110071
<BONDS> 0
0
0
<COMMON> 356
<OTHER-SE> 354489
<TOTAL-LIABILITY-AND-EQUITY> 752270
<SALES> 0
<TOTAL-REVENUES> 168788
<CGS> 0
<TOTAL-COSTS> 244341
<OTHER-EXPENSES> 32137
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3325
<INCOME-PRETAX> (110709)
<INCOME-TAX> (40261)
<INCOME-CONTINUING> (70448)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (70448)
<EPS-BASIC> (1.99)
<EPS-DILUTED> (1.99)
</TABLE>
