UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 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.
35,510,304 Common shares, $.01 par value, as of May 13, 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>
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<CAPTION>
POLICY MANAGEMENT SYSTEMS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
<S> <C>
Consolidated Statements of Income for the Three
Months Ended March 31, 1999 and 1998 . . . . . . . . 3
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998. . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income for the Three
Months Ended March 31, 1999. . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 . . . . . 6
Notes to Consolidated Financial Statements . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . 22
Item 6. Exhibits and Reports on Form 8-K . . . . . . 22
Signatures . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I
FINANCIAL INFORMATION
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months
Ended March 31,
1999 1998
(Unaudited)
------------------
(In thousands, except
per share data)
<S> <C> <C>
REVENUES
Licensing . . . . . . . . . . . . . . . . . . . $ 35,952 $ 28,737
Services. . . . . . . . . . . . . . . . . . . . 125,523 111,684
--------- ---------
161,475 140,421
--------- ---------
OPERATING EXPENSES
Cost of revenues
Employee compensation and benefits. . . . . . 73,725 63,242
Computer and communications expenses. . . . . 11,913 7,790
Depreciation and amortization of property,
equipment and capitalized software costs . . 16,140 15,226
Other costs and expenses. . . . . . . . . . . 7,458 6,185
Selling, general and administrative expenses. . 25,652 24,707
Amortization of goodwill and other intangibles. 3,077 2,423
--------- ---------
137,965 119,573
--------- ---------
OPERATING INCOME . . . . . . . . . . . . . . . . 23,510 20,848
Equity in earnings of unconsolidated affiliates. 141 205
Minority interest. . . . . . . . . . . . . . . . (39) -
Other Income and Expenses
Investment income. . . . . . . . . . . . . . . 231 502
Interest expense and other charges . . . . . . (1,513) (927)
--------- ---------
(1,282) (425)
--------- ---------
Income from continuing operations
before income taxes. . . . . . . . . . . . . . 22,330 20,628
Income taxes . . . . . . . . . . . . . . . . . . 8,262 7,761
--------- ---------
INCOME FROM CONTINUING OPERATIONS. . . . . . . . 14,068 12,867
DISCONTINUED OPERATIONS:
Income from operations of discontinued
operations less applicable income taxes
of $215. . . . . . . . . . . . . . . . . . . - 322
--------- ---------
NET INCOME . . . . . . . . . . . . . . . . . . . $ 14,068 $ 13,189
========= =========
BASIC EARNINGS PER SHARE:
Income from continuing operations. . . . . . . $ 0.39 $ 0.35
Income from discontinued operations. . . . . . - 0.01
--------- ---------
$ 0.39 $ 0.36
========= =========
DILUTED EARNINGS PER SHARE:
Income from continuing operations. . . . . . . $ 0.37 $ 0.33
Income from discontinued operations. . . . . . - 0.01
--------- ---------
$ 0.37 $ 0.34
========= =========
Weighted average common shares . . . . . . . . . 36,128 36,687
Weighted average common shares assuming dilution 38,337 39,192
<FN>
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
March 31, December 31,
1999 1998
-------- --------
(In thousands, except share data)
<S> <C> <C>
Assets
Current assets
Cash and equivalents. . . . . . . . . . . . . . . . . . . . $ 14,294 $ 26,013
Receivables, net of allowance for uncollectible
amounts of $1,660 ($2,051 at 1998) . . . . . . . . . . . . 144,095 104,299
Accrued revenues. . . . . . . . . . . . . . . . . . . . . . 41,877 45,686
Deferred income taxes . . . . . . . . . . . . . . . . . . . 7,121 9,336
Other receivable. . . . . . . . . . . . . . . . . . . . . . - 11,279
Prepaids. . . . . . . . . . . . . . . . . . . . . . . . . . 12,818 8,645
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,028 11,968
--------- ---------
Total current assets. . . . . . . . . . . . . . . . . . . 234,233 217,226
Property and equipment, at cost less accumulated
depreciation and amortization of $128,740
($128,363 at 1998). . . . . . . . . . . . . . . . . . . . . 141,265 135,436
Accrued revenues . . . . . . . . . . . . . . . . . . . . . . 9,742 7,844
Income tax receivable. . . . . . . . . . . . . . . . . . . . 4,041 4,041
Goodwill and other intangibles, net. . . . . . . . . . . . . 82,540 81,401
Capitalized software costs, net. . . . . . . . . . . . . . . 226,482 220,908
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 24,277 24,787
Investments. . . . . . . . . . . . . . . . . . . . . . . . . 9,953 9,661
Cost of acquisition to be allocated. . . . . . . . . . . . . 22,108 -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,929 17,394
--------- ---------
Total assets. . . . . . . . . . . . . . . . . . . . . . $773,570 $718,698
========= =========
Liabilities
Current liabilities
Accounts payable and accrued expenses . . . . . . . . . . . $ 50,209 $ 57,129
Current portion of long-term debt . . . . . . . . . . . . . 7,241 15,812
Income taxes payable. . . . . . . . . . . . . . . . . . . . 18,723 9,202
Unearned revenues . . . . . . . . . . . . . . . . . . . . . 20,709 15,804
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 890 988
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . 97,772 98,935
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . 157,000 85,000
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 97,244 98,233
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,739 3,520
--------- ---------
Total liabilities. . . . . . . . . . . . . . . . . . . . 355,755 285,688
--------- ---------
Minority interest. . . . . . . . . . . . . . . . . . . . . . 551 526
Commitments and contingencies (Note 3)
Stockholders' equity
Special stock, $.01 par value, 5,000,000 shares authorized . - -
Common stock, $.01 par value, 75,000,000 shares authorized,
35,886,073 shares issued and outstanding
(36,357,139 at December 31, 1998) . . . . . . . . . . . . . 359 364
Additional paid-in capital . . . . . . . . . . . . . . . . . 65,559 82,396
Retained earnings. . . . . . . . . . . . . . . . . . . . . . 373,522 359,454
Accumulated other comprehensive income . . . . . . . . . . . (12,101) (9,730)
Stock employee compensation trust. . . . . . . . . . . . . . (10,075) -
--------- ---------
Total stockholders' equity . . . . . . . . . . . . . . . 417,264 432,484
--------- ---------
Total liabilities and stockholders' equity. . . . . . . $773,570 $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 Stock
Additional Other Employee
Common Paid-In Retained Comprehensive Compensation
Stock Capital Earnings Income(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 income . . . . . . . . . - - 14,068 - - 14,068
Other comprehensive income,
net of tax:
Foreign currency
translation adjustments . - - - (2,371) - (2,371)
---------
Total comprehensive income. . 11,697
---------
Purchase of shares for SECT . - - - - (10,094) (10,094)
Restricted stock vested . . . - (3) - - 19 16
Stock options exercised
(108,934 shares). . . . . . 1 3,957 - - - 3,958
Repurchase of 580,000 shares
of common stock . . . . . . (6) (20,791) - - - (20,797)
-------- --------- -------- --------- --------- ---------
BALANCE, MARCH 31, 1999 . . . $ 359 $ 65,559 $373,522 $(12,101) $(10,075) $417,264
======== ========= ======== ========= ========= =========
<FN>
See accompanying notes
(1) Comprehensive income for the three months ended March 31, 1998 was $12,881.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
1999 1998
------- -------
(In thousands)
Operating Activities
<S> <C> <C>
Net income. . . . . . . . . . . . . . . . . . . . . . . $ 14,068 $ 13,189
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . 20,403 19,718
Deferred income taxes . . . . . . . . . . . . . . . . 1,736 3,264
Provision for uncollectible accounts. . . . . . . . . (299) (42)
Changes in assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . (37,803) (972)
Accrued revenues. . . . . . . . . . . . . . . . . . . 2,053 3,074
Other receivable. . . . . . . . . . . . . . . . . . . 11,279 -
Accounts payable and accrued expenses . . . . . . . . (7,682) (9,155)
Income taxes payable. . . . . . . . . . . . . . . . . 9,521 1,208
Unearned revenues . . . . . . . . . . . . . . . . . . 4,657 (2,281)
Other, net. . . . . . . . . . . . . . . . . . . . . . . (10,895) (4,425)
--------- ---------
Cash provided by operations. . . . . . . . . . . . 7,038 23,578
--------- ---------
Investing Activities
Proceeds from sales/maturities of available-for-
sale securities. . . . . . . . . . . . . . . . . . . . - 3,257
Proceeds from sales of held-to-
maturity securities. . . . . . . . . . . . . . . . . . - 2,969
Acquisition of property and equipment . . . . . . . . . (12,123) (9,244)
Capitalized internal software development costs . . . . (16,841) (14,880)
Business acquisition. . . . . . . . . . . . . . . . . . (4,045) (2,688)
Cost of acquisition to be allocated . . . . . . . . . . (22,108) -
Investment in unconsolidated affiliate. . . . . . . . . 36 -
Proceeds from disposal of property and equipment. . . . 221 200
Other . . . . . . . . . . . . . . . . . . . . . . . . . (393) (3,069)
--------- ---------
Cash used by investing activities. . . . . . . . . (55,253) (23,455)
--------- ---------
Financing Activities
Payments on long-term debt. . . . . . . . . . . . . . . (27,471) (18,271)
Proceeds from borrowing under credit facility . . . . . 90,900 4,495
Purchase of stock for Stock Employee Compensation Trust (10,094) -
Issuance of common stock under stock
option plans . . . . . . . . . . . . . . . . . . . . . 3,958 11,025
Repurchase of common stock. . . . . . . . . . . . . . . (20,797) (9,960)
--------- ---------
Cash provided (used) by financing activities . . . 36,496 (12,711)
--------- ---------
Net decrease in cash and equivalents . . . . . . . . . . (11,719) (12,588)
Cash and equivalents at beginning of period. . . . . . . 26,013 32,179
--------- ---------
Cash and equivalents at end of period. . . . . . . . . . $ 14,294 $ 19,591
========= =========
Supplemental Information
Interest paid . . . . . . . . . . . . . . . . . . . . . $ 1,094 $ 703
Income taxes (refunded) paid. . . . . . . . . . . . . . (2,834) 1,129
<FN>
See accompanying notes
</TABLE>
<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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, "Earnings
Per Share". For the Company, the numerator is the same for the calculation of
both basic and diluted EPS. The following is a reconciliation of the
denominator used in the EPS calculations (in thousands):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
1999 1998
------ ------
Weighted Average Shares
- -------------------------
<S> <C> <C>
Basic EPS. . . . . . . . . . . 36,128 36,687
Effect of common stock options 2,209 2,505
------ ------
Diluted EPS. . . . . . . . . . 38,337 39,192
====== ======
</TABLE>
Options to purchase 2,776 and 1,388 shares of common stock at $42.78 and
$45.56 per share, respectively, were outstanding but were not included in the
computation of diluted EPS for the period ending March 31, 1999.
OTHER MATTERS
Certain prior period amounts have been reclassified to conform to current
period presentation.
<PAGE>
NOTE 2. ACQUISITIONS
On March 31, 1999, the Company purchased Legalgard Partners, L.P.
("Legalgard"), a Philadelphia-based legal cost containment business for $23.2
million whose principal indirect investor was Reliance Insurance Company
("Reliance"). 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 acquisition has been recorded using the purchase method of accounting.
Accordingly, the Consolidated Statement of Operations of the Company does not
include Legalgard's results of operations for the first quarter. The amount in
the accompanying balance sheet "Cost of acquisition to be allocated" reflects
the unallocated cost of the Legalgard acquisition in excess of tangible net
assets which have been consolidated. The Company has engaged an independent
firm to appraise the value of the identifiable intangibles obtained in this
acquisition. Their valuation is expected to be finalized over the next several
weeks.
NOTE 3. CONTINGENCIES
The Company is involved in litigation which commenced in January 1996 in
the Circuit Court in Greenville County, South Carolina, with Liberty Life
Insurance Company and certain of its affiliates ("Liberty") arising out of the
parties' prior contractual relationship related to the development and licensing
of Series III life insurance systems and the subsequent licensing of the
Company's CYBERTEK life insurance systems. Liberty's complaint alleges breach
of contract, breach of express and implied warranties, fraudulent inducement,
breach of contract accompanied by a fraudulent act, and recission. Liberty has
alleged actual and consequential damages in excess of $180 million and also
seeks treble and punitive damages. The Company has asserted various affirmative
defenses and is pursuing counterclaims against Liberty for breach of contract,
recoupment, breach of good faith and fair dealing, and breach of contract
accompanied by a fraudulent act. The Company is seeking equitable relief,
including injunctive relief, and currently unspecified actual, compensatory and
consequential damages.
In addition to the litigation described above, there are also various other
litigation proceedings and claims arising in the ordinary course of business.
The Company believes it has meritorious defenses and is vigorously defending
these matters.
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
with the proposed adjustments, believes it has meritorious arguments against
them and intends to vigorously defend its position.
<PAGE>
While the resolution of any of the above matters could have a material adverse
effect on the results of operations in future periods, the Company does not
expect these matters to have a material adverse effect on its consolidated
financial position. The Company, however, is unable to predict the ultimate
outcome or the potential financial impact of these matters.
NOTE 4. SEGMENT INFORMATION
The Company's operating segments are the five revenue-producing components
of the Company for which separate financial information is produced for internal
decision making and planning purposes. The segments are as follows:
1. Property and casualty enterprise software and services (generally referred to
as "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 and Canada.
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.
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.
<PAGE>
Information about the Company's operations for the three months ended March 31,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------
1999 1998
-------- -------
(In thousands)
REVENUES FROM EXTERNAL CUSTOMERS
<S> <C> <C>
Property and casualty . . . . . . . . . . . $ 73,638 $ 67,525
Life and financial solutions. . . . . . . . 41,633 30,425
--------- ---------
Total US revenues . . . . . . . . . . . . 115,271 97,950
International . . . . . . . . . . . . . . . 46,204 42,471
--------- ---------
Total revenues from
continuing operations. . . . . . . . . $161,475 $140,421
========= =========
Discontinued operations . . . . . . . . . . - 7,125
INCOME (EXPENSE) FROM CONTINUING OPERATIONS
Property and casualty . . . . . . . . . . . $ 21,389 $ 17,928
Life and financial solutions. . . . . . . . 7,633 6,879
Corporate and US administrative . . . . . . (7,172) (6,491)
--------- ---------
Total US operating income . . . . . . . . 21,850 18,316
--------- ---------
International . . . . . . . . . . . . . . . 3,439 4,494
International administrative. . . . . . . . (1,779) (1,962)
--------- ---------
Total international . . . . . . . . . . . 1,660 2,532
--------- ---------
Operating income. . . . . . . . . . . . . 23,510 20,848
Equity in earnings of
unconsolidated affiliates . . . . . . . . 141 205
Minority interest . . . . . . . . . . . . . (39) -
Other income and expenses . . . . . . . . . (1,282) (425)
Income taxes. . . . . . . . . . . . . . . . 8,262 7,761
--------- ---------
Income from continuing operations . . . . $ 14,068 $ 12,867
========= =========
Discontinued operations . . . . . . . . . . $ - $ 560
Other income and expenses . . . . . . . . . - (23)
Income taxes. . . . . . . . . . . . . . . . - (215)
--------- ---------
Discontinued operations, net. . . . . . . $ - $ 322
========= =========
</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 Three
Months Ended Months
March 31, Ended
--------------
1999 1998 March 31
----- ----- ------------
<S> <C> <C> <C>
Revenues
Licensing . . . . . . . . . . . . . 22.3% 20.5% 25.1%
Services. . . . . . . . . . . . . . 77.7 79.5 12.4
------ ------
100.0 100.0 15.0
------ ------
Operating expenses
Cost of revenues
Employee compensation and benefits 45.7 45.0 16.6
Computer & communication expenses. 7.4 5.6 52.9
Depreciation & amortization
property, equipment &
capitalized software costs. . . . 10.0 10.8 6.0
Other costs & expenses . . . . . . 4.6 4.4 20.6
Selling, general &
administrative expenses . . . . . 15.9 17.6 3.8
Amortization of goodwill and
other intangibles . . . . . . . . 1.9 1.7 27.0
------ ------
85.5 85.1 15.4
------ ------
Operating income . . . . . . . . . . 14.5 14.9 12.8
Equity in earnings of unconsolidated
affiliates. . . . . . . . . . . . 0.1 0.1 (31.2)
Other income and expenses. . . . . . (0.8) (0.3) 201.6
------ ------
Income from continuing operations
before income taxes. . . . . . . . 13.8 14.7 8.3
Income taxes . . . . . . . . . . . . 5.1 5.5 6.5
------ ------
Income from continuing operations. . 8.7 9.2 9.3
Discontinued operations, net . . . . - 0.2 (100.0)
------ ------
Net income . . . . . . . . . . . . . 8.7% 9.4% 6.7%
====== ======
</TABLE>
<PAGE>
THREE MONTH COMPARISON
REVENUES
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
Licensing 1999 1998 Change
------ ------ ------
(Dollars in Millions)
<S> <C> <C> <C>
Initial charges. . . . . . . $18.7 $12.6 48%
Monthly charges. . . . . . . 17.3 16.1 7
------ ------
$36.0 $28.7 25%
====== ======
Percentage of total revenues 22% 21%
------ ------
</TABLE>
In licensing the Company's products, customers generally obligate
themselves to a non-refundable initial license charge and a monthly license fee
payable over a specified period of time, which is usually six years.
The monthly license charge entitles the customer, over the contract period, to
use the licensed product and to receive product support and enhancements.
Initial license revenues increased $6.1 million for the first quarter of
1999 compared to the first quarter of 1998, with the following increases by
business segment: property and casualty up 111% ($5.8 million); life and
financial solutions up 4% ($0.1 million); and international up 5% ($0.2
million).
Initial license charges for the first quarter of 1999 include right-to-use
licenses of $6.4 million. This compares to $4.9 million in right-to-use
licenses for the first 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.
First quarter 1999 initial license charges include the first license of the
Company's new workplace injury claims management tool, Claims Outcome Advisor,
which was sold to Reliance Insurance Company.
Monthly license charges increased $1.2 million for the first quarter of
1999 compared to the first quarter of 1998 with the following increases or
decreases by business segment: property and casualty down 15% ($1.2 million);
life and financial solutions up 53% ($1.7 million); and international up 16%
($0.7 million).
<PAGE>
Because a significant portion of initial licensing revenues are recorded at the
time new systems are licensed and such licensing activity can vary dramatically
from quarter to quarter, there can be significant fluctuations in revenue from
quarter to quarter. Set forth below is a comparison of initial license revenues
for the last eight quarters expressed as a percentage of total revenues for each
of the periods presented:
1999 1998 1997
----- -------------------------- ---------------------
1st 4th 3rd 2nd 1st 4th 3rd 2nd
----- -------------------------- ---------------------
(Dollars in Millions)
Initial license revenues $18.7 $27.3 $14.7 $13.0 $12.6 $25.1 $16.9 $16.6
% of total revenues 12% 16% 10% 9% 9% 17% 13% 13%
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------
Services 1999 1998 Change
------ ------ ------
(Dollars In Millions)
<S> <C> <C> <C>
Professional and outsourcing $125.2 $110.8 13%
Other. . . . . . . . . . . . 0.3 0.9 (64)
------- -------
$125.5 $111.7 12%
======= =======
Percentage of total revenues 78% 79%
------- -------
</TABLE>
Professional and outsourcing services revenues increased $14.4 million for the
first quarter of 1999 compared to the first quarter of 1998, with the following
increases by business segment: property and casualty up 4% ($2.0 million); life
insurance and financial solutions up 39% ($9.4 million); and international up 9%
($3.0 million). The increases are principally due to increases in both
implementation services and in the processing volumes of services provided to
new and existing customers. The 1999 first quarter revenues include $1.6
million for professional services rendered and received in connection with the
settlement of a dispute with a customer who has terminated its relationship with
the Company. Amounts paid by the Company in connection with the resolution of
this dispute were covered by insurance and existing legal reserves and had no
impact on the Company's operating results.
OPERATING EXPENSES
COST OF REVENUES
Employee compensation and benefits increased 17% for the first quarter of
1999 compared to the first quarter of 1998. The net increase results
principally from higher salaries and related costs associated with the growth in
professional services staffing being somewhat offset by the transfer of certain
employee costs to computer and communication expenses as a result of the
Company's data center outsourcing agreement with Lockheed Martin Corporation
("Lockheed Martin"). Had these employee costs not been transferred, first
quarter 1999 employee compensation and benefits would have increased 19% by
comparison to the same period last year. Compensation and benefits increased
14% ($2.7 million) internationally and 17% ($7.8 million) domestically.
<PAGE>
Computer and communications expenses increased 53% for the first quarter of 1999
compared to the first quarter of 1998. At the beginning of the third quarter of
1998, the Company entered into a data center outsourcing agreement with Lockheed
Martin Corporation. As a result, certain costs previously included in employee
compensation and benefits are now included in computer and communications
expense". Had these employee costs not been transferred, first quarter 1999
computer and communication expense would have increased 32% by comparison to the
same period last year. The savings from the outsourcing agreement were offset
by increased communications volumes, increased network and PC related expenses
and increased license fees for operational data center software.
Depreciation of property and equipment remained relatively unchanged for
the first quarter of 1999 compared to the first quarter of 1998
Amortization of capitalized software costs increased 7% due to the various
releases of the Company's internally developed software products.
Other operating costs and expenses increased 21% for the first quarter of
1999 compared to the first quarter of 1998, principally due to increased rent,
third party commissions and contract loss expenses, partially offset by lower
consultant expenses and increased amounts of capitalized software development
costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 4% for the first
quarter of 1999 compared to the first quarter of 1998, principally due to
increased other salary costs.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles increased 27% for the first
quarter of 1999 compared to the first quarter of 1998, principally due to
increased amortization related to the acquisition of The Leverage Group.
OPERATING INCOME
1999 first quarter operating income increased 13% compared to the 1998
first quarter. Increases or decreases in segment operating income were:
property and casualty increased 19%, life and financial solutions increased 11%
and international decreased 23%. The increase in operating income domestically
is primarily related to increases in initial licensing, professional services
and outsourcing revenues while operating costs increased at a slower rate than
the related revenue. The decrease internationally is due to increased
development costs and a lower percentage of initial license revenues as a
component of total revenue.
<PAGE>
OTHER INCOME AND EXPENSE
Interest expense increased 63% for the first quarter of 1999 compared to
the first quarter of 1998, principally due to higher levels of borrowed funds
under the Company's credit facility. The average nominal interest rate
applicable to borrowings under the Company's credit facility during the first
quarter of 1999 was 5.2%.
INCOME TAXES
The effective income tax rate (income taxes expressed as a percentage of pre-tax
income) was 37% and 37.6% for the first quarters of 1999 and 1998, respectively.
The effective rate for the first quarter of 1999 is higher than the federal
statutory rate principally due to the effect of state and local income taxes.
DISCONTINUED OPERATIONS
During 1998, the Company's results included discontinued operations of the life
information services segment. The Company sold these operations in the second
quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
- ---------------------------------------------------
(Dollars in Millions)
<S> <C> <C>
Cash and equivalents, marketable
securities, and investments. . $ 24.2 $ 35.7
Current assets . . . . . . . . . 234.2 217.2
Current liabilities. . . . . . . 97.8 98.9
Working capital. . . . . . . . . 136.4 118.3
Long-term debt . . . . . . . . . 157.0 85.0
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
- ---------------------------------------------------------------
(Dollars in Millions)
<S> <C> <C>
Cash provided by operations. . . . . . . . . $ 7.0 $ 23.6
Cash (used) by investing activities. . . . . (55.3) (23.5)
Cash provided (used) by financing activities 36.5 (12.7)
</TABLE>
The Company's current ratio (current assets divided by current liabilities)
stood at 2.4 at March 31, 1999, which management believes is sufficient when
combined with the available credit facility to provide for day-to-day operating
needs and the flexibility to take advantage of investment opportunities. At
March 31, 1999, the Company had available $43 million of its $200 million credit
facility. Also at March 31, 1999, the Company had $6.7 million outstanding on
its uncommitted operating line of credit. During April 1999, the Company
obtained an increase in this line of credit to $40 million, which will decrease
to $20 million at June 30, 1999.
<PAGE>
During the three months ended March 31, 1999 the Company capitalized
software development costs of $16.8 million, principally related to the
development of its S3+ client/server property and casualty software, CyberLife
object-oriented client/server life insurance software, and I+ international
property and casualty solution as well as other ongoing projects for other
domestic as well as international products.
Significant expenditures anticipated for the remainder of 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.
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. 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
<PAGE>
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 facility, 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.
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
designate the 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.
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.
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.
<PAGE>
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.
<PAGE>
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. Testing components that have been repaired. Such tests include both
system tests and integrated tests in test environments with machine dates
advanced to reflect future dates in the year 1999 and the year 2000.
IMPLEMENTATION. Migrating systems, applications, and hardware to production
environments, installation of replacement systems and the retirement of
designated components, as well as finalizing, documenting and taking care of
residual activities. This phase also includes the compilation and retention of
supporting documentation that conforms to prescribed corporate standards.
Product Offerings
- ------------------
The Company has updated the code of its primary product offerings to
process dates across the century boundary. Current testing has confirmed the
ability of the applications to process data in both centuries. Beyond that,
additional testing is continuing on the Company's base products in an
environment that utilizes accelerated system dates ("Year 2000 environment").
This additional testing seeks to confirm that no unanticipated problems will
occur due to third party products with which the Company's applications are
designed to operate. Once all of the Company's base products have been tested
in a Year 2000 environment, redundant testing will continue through the
remainder of 1999.
The Year 2000 environment testing of the Company's products was originally
scheduled for completion by June 30, 1999. However, efforts to validate the
Company's readiness through internal audits have identified the need for
additional areas of testing and have lead to a re-prioritization of final tests.
The scheduled completion date of June 30, 1999 is in the process of being
re-evaluated in light of the additional testing requirements and may need to be
extended to ensure that all products are adequately tested.
Based on current inventories, the Company is continuing the process of
contacting critical, third party dependencies to determine whether remediation
efforts or alternative measures to handle Year 2000 impacts are necessary.
Service Offerings
- ------------------
The Company has completed Year 2000 application code remediation for all
domestic property and casualty customers who will be Business Process
Outsourcing ("BPO")/Information Technology Outsourcing ("ITO") customers after
December 31, 1999. Live customer data is currently being processed on these
<PAGE>
remediated applications in a production environment. Based upon customer
preference, additional testing is scheduled through and to the end of 1999 in a
Year 2000 environment. This testing is designed to confirm that no
unanticipated problems will occur due to third party products with which the
Company's applications are designed to operate.
Internal Systems
- -----------------
Internal systems consist primarily of third-party products used by the
Company for its internal operations which include data center hardware and
software, internal financial and human resource systems, and network and PC
hardware and software. The Company's Blythewood data center has completed its
hardware and operating software inventory, and assessments. Remediation and
testing efforts, which are substantially complete, are on schedule in order to
satisfy Year 2000 requirements. As of July 1, 1998, Lockheed Martin took over
the data processing equipment and operational control of the Blythewood data
center. Remaining remediation efforts for this data center are being
coordinated with Lockheed Martin. The Company's Australian and European data
centers have also completed their inventory and assessment of hardware and
operating software for Year 2000 requirements. Final implementation for all
data centers is on schedule for completion by June 30, 1999. Independent audits
of these data centers, which are scheduled throughout the second and third
quarters of 1999, will verify their readiness. Any additional efforts identified
during these audits will be addressed immediately.
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
substantially operational. The solution's human resources functionality is
scheduled to be fully operational during the third quarter of 1999. The
selected solution meets Year 2000 requirements.
The Company has substantially completed its inventory and assessment of its
network and PC hardware and software to determine if any Year 2000 remediation
upgrades will be required. As part of the assessment and verification processes,
a number of unanticipated upgrades to the Company's network and desktop software
systems necessary to meet Year 2000 requirements have been identified. Further
analysis is in process to evaluate the impact of these issues on the originally
scheduled completion date of September 30, 1999.
The Company has also assessed readiness with respect to non-IT systems
which relate primarily to the ordinary maintenance and operation of its physical
facilities, such as elevators, heating and air conditioning.
<PAGE>
- ------
Suppliers and Trading Partners
- ---------------------------------
The Company's ability to operate is dependent on relationships with certain
suppliers and trading partners, such as electric utilities and telephone
companies, who provide services to the Company's various offices and data
centers ("mission critical suppliers and trading partners"). The Company has
completed the process of identifying all potential mission critical suppliers
and trading partners. All identified mission critical third party systems and
data interfaces will be tested, to the extent practical, in a Year 2000
environment.
The Company's ability to influence the full disclosure and cooperation of
its mission critical suppliers and trading partners is partially dependent on
the significance of the Company's relationship with them and their willingness
to comply.
Year 2000 Costs
- -----------------
Since 1993, the Company estimates that it has incurred approximately $17
million of costs in addressing Year 2000 remediation issues and will spend
approximately $3 million during the remainder of 1999. Based on the Company's
experience to date, it is not anticipated that the completion of the remaining
Year 2000 remediation efforts will have a material adverse effect upon the
Company's financial position or results of operations. The Company's past and
anticipated future remediation costs are funded by operations.
Year 2000 Risks
- -----------------
The Company's products are designed to be used with and require use of
third-party products, such as operating systems and compilers. Also, customers
often modify the Company's products to suit their unique requirements. If these
third parties experience Year 2000 failures of their products, or if customers
experience system failures as a result of their modifications or for other
reasons, the Company could become involved in disputes or litigation related to
the cause of such system failures.
In addition, the failure to correct material Year 2000 problems could
result in an interruption in, or a failure of, certain normal business
activities or operations and litigation. Such failures could materially and
adversely affect the Company's results of operations, liquidity and financial
condition. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of third-party
suppliers and the Company's customers and prospective customers, the Company is
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on the Company's results of operations, liquidity or
financial condition. The Year 2000 Project is expected to significantly reduce
the Company's level of uncertainty about the Year 2000 problem and, in
particular, about the Year 2000 compliance and readiness of its mission critical
suppliers and trading partners. The Company believes that, with the
implementation of new business systems and completion of the Project as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
<PAGE>
The Company has prepared contingency plans for its facilities and is in the
process of developing operational contingency plans for mission critical
organizations to minimize the effect of unforeseen disruptions.
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 3, Contingencies, of Notes to Consolidated Financial Statements,
which is incorporated by reference in this Item.
ITEMS 2, 3, 4 AND 5 are not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits
Exhibits required to be filed with this Quarterly Report on Form 10-Q are
listed in the following Exhibit Index.
Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
March 31, 1999.
<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POLICY MANAGEMENT SYSTEMS CORPORATION
-------------------------------------
(Registrant)
Date: May 17, 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 July 19, 1994, incorporating
all amendments thereto subsequent to December 31, 1993 (filed as an Exhibit to
Form 10-K for the year ended December 31, 1994, and is incorporated herein by
reference)
B. Articles of Incorporation of the Company, as amended through October 13,
1994, incorporating all amendments thereto subsequent to December 31, 1993
(filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is
incorporated herein by reference)
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES
A. Specimen forms of certificates for Common Stock of the Company (filed as
an Exhibit to Registration Statement No. 2-74821, dated December 16, 1981, and
is incorporated herein by reference)
B. Articles of Incorporation of the Company, as amended through October 13,
1994, incorporating all amendments thereto subsequent to December 31, 1993
(filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is
incorporated herein by reference)
10. MATERIAL CONTRACTS
A. 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 a schedule identifying particulars for each named executive
<PAGE>
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 a schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-Q for the quarter ended September 30,
1994, and is incorporated herein by reference)
I. Stock Option Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-K for the year ended December 31, 1994,
and is incorporated herein by reference)
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 Exhibits 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 a schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1995,
and is incorporated herein by reference)
O. Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-K for year ended December 31, 1995, and
is incorporated herein by reference)
P. Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-K for year ended December 31, 1995, and
is incorporated herein by reference)
Q. Stock Option/Non-Compete Agreement Amendment No. 1 dated November 8,
1995, to Stock Option/Non-Compete Agreement dated July 20, 1995, with Paul R.
Butare (filed as an Exhibit to Form 10-K for year ended December 31, 1995, and
is incorporated herein by reference)
R. 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)
S. 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)
T. Registration Rights Agreement, dated March 8, 1996, between Policy
Management Systems Corporation and Continental Casualty Company (filed as an
<PAGE>
Exhibit to Form 10-Q for the quarter ended March 31, 1996, and is incorporated
herein by reference)
U. 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)
V. Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1996,
and is incorporated herein by reference)
W. Employment Agreement Form dated November 7, 1996, for Messrs. Butare,
Morrison and Williams together with a schedule identifying particulars for each
executive officer (filed as an Exhibit to Form 10-K for year ended December 31,
1996, and is incorporated herein by reference)
X. 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)
Y. Stock Option/Non-Compete Form Agreement dated January 8, 1997 for named
executive officers together with a schedule identifying particulars for each
executive officer (filed as an Exhibit to Form 10-Q for the quarter ended March
31, 1997, and is incorporated herein by reference)
Z. Form of Amendment No. 1 to the Employment Agreements with Messrs. Butare,
Morrison and Williams, together with a schedule identifying particulars for each
executive officer (filed as an Exhibit to Form 10-Q for the quarter ended June
30, 1997, and is incorporated herein by reference)
AA. Form of Employment Agreements with Messrs. Wilson, Bailey and Coggiola
together with schedule identifying particulars for each executive officer (filed
as an Exhibit to Form 10-Q for the quarter ended September 30, 1997, and is
incorporated herein by reference)
BB. Credit Agreement dated as of August 8, 1997, among Policy Management
Systems Corporation, the Guarantors Party hereto, Bank of America National Trust
and Savings Association and the Other Financial Institution Party Hereto (filed
as an exhibit to Form 10-Q for the quarter ended September 30, 1997, and is
incorporated herein by reference)
CC. Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an exhibit to Form 10-Q for the quarter ended March 31, 1998
and is incorporated herein by reference)
DD. Policy Management Systems Corporation Restricted Stock Ownership Plan
(filed as an exhibit to Form 10-Q for the quarter ended September 30, 1998 and
is incorporated herein by reference)
EE. 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 the quarter ended September 30, 1998 and is
incorporated herein by reference)
<PAGE>
FF. Memorandum of Amendment of Employment Agreement with Paul R. Butare
dated December 10, 1998 (filed as an exhibit to Form 10-K for the year ended
December 31, 1998 and is incorporated herein by reference)
GG. 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)
HH. Annual Bonus Program for Executive Officers (filed as an exhibit to Form
10-K for the year ended December 31, 1998 and is incorporated herein by
reference)
II. Form of Restricted Stock Award Agreement dated March 1, 1999 with
Messrs. Berkeley, Feddersen, Palms, Sargent, Seibels and Trub (filed herewith)
JJ. Form of Restricted Stock Award Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed herewith)
27. FINANCIAL DATA SCHEDULES
A. Three Months Ended March 31, 1999 filed herewith (EDGAR version only)
POLICY MANAGEMENT SYSTEMS CORPORATION
RESTRICTED STOCK AWARD AGREEMENT
--------------------------------
Award Agreement, dated as of March 1, 1999 (the "Date of Grant") between
POLICY MANAGEMENT SYSTEMS CORPORATION, a South Carolina corporation (the
"Company"), and ____ (the "Participant"). This Award Agreement is pursuant to
the terms of the Company's Restricted Stock Ownership Plan (the "Plan"). The
applicable terms of the Plan are incorporated herein by reference, including the
definition of terms contained in the Plan.
Section 1. Restricted Stock Award. The Company grants to the
---------- ------------------------
Participant, on the terms and conditions hereinafter set forth, a Restricted
Stock award with respect to 351 SHARES of the Common Stock of the Company (the
"Restricted Stock").
Section 2. Vesting of Restricted Stock. Subject to Sections 3 and
--------- ---------------------------
4 hereof, the Restricted Stock shall become vested and nonforfeitable in five
equal annual installments based on the continued service of the Participant on
the Board in accordance with the following vesting schedule:
Vesting Date Number of Shares
------------- ------------------
1. January 1, 2000 70
2. January 1, 2001 70
3. January 1, 2002 70
4. January 1, 2003 70
5. January 1, 2004 71
Section 3. Termination of Service. If the Participant's service on
--------- ----------------------
the Board is terminated by reason of Retirement, Disability or Death, all
unvested shares of Restricted Stock shall become immediately vested and
nonforfeitable. If the Participant's service on the Board is terminated by the
Company without Cause prior to any applicable vesting date, two-thirds (2/3) of
the remaining unvested shares of Restricted Stock shall become immediately
vested and nonforfeitable, and one-third (1/3) of the remaining unvested shares
shall be forfeited to the Company (in each case rounded upward or downward to
the nearest whole share, as applicable). If the Participant is nominated but is
not reelected as a member of the Board by the shareholders of the Company, the
restrictions imposed on any unvested portion of the Restricted stock shall
immediately lapse. If the Participant's service on the Board is terminated for
any reason other than as provided above in this Section 3 (including, without
limitation, voluntary termination by the Participant or termination by the
Company for Cause) prior to any applicable vesting date, the Participant shall
forfeit his interest in all shares of Restricted Stock that have not become
vested as of the date of termination. Any shares of Restricted Stock that are
forfeited by the Participant hereunder shall be returned and transferred to the
Company or the Plan Trust, as determined by the Company, and the Participant
shall cease for all purposes to be a shareholder of such shares as of the date
of termination of service.
<PAGE>
Section 4. Change of Control. All shares of Restricted Stock
---------- -------------------
shall become fully and immediately vested and nonforfeitable upon the occurrence
of a Change of Control of the Company prior to any scheduled vesting date as
provided in Section 2 hereof, provided that the Participant remains an
Independent Director of the Company on the date of the Change in Control.
Section 5. Rights as a Shareholder. Subject to the otherwise
---------- --------------------------
applicable provisions of the Plan and this Award Agreement, the Participant will
have all rights of a shareholder with respect to shares of Restricted Stock
granted to the Participant hereunder, including the right to vote the shares and
receive all dividends and other distributions paid or made with respect thereto.
Section 6. Restrictions on Transfer. Neither this Award nor any
---------- -------------------------
shares of the Restricted Stock covered hereby may be sold, assigned,
transferred, encumbered, hypothecated or pledged by the Participant, otherwise
than to the Company, unless as of the date of any such sale, assignment,
transfer, encumbrance, hypothecation or pledge, such shares of Restricted Stock
to be thus disposed of have become vested in accordance with this Award
Agreement. The certificate or certificates representing shares delivered
pursuant to the Award shall bear a legend referring to the nontransferability or
assignability of such shares pursuant to this Section, and a stop-transfer order
against such certificate or certificates will be placed by the Company with its
transfer agents and registrars. At the discretion of the Committee, in lieu of
issuing a stock certificate to the Participant, the Company or its designated
agent may hold the shares of Restricted Stock in escrow during the period such
shares remain subject to the vesting restrictions and other restrictions
provided hereunder.
Section 7. Award Subject to Plan. This Award and the Restricted
---------- ----------------------
Stock acquired hereunder are subject to the Plan, the terms and provisions of
which, as it may be amended from time to time, are hereby incorporated herein by
reference. In the event of a conflict between any term or provision contained
herein and a term or provision of the Plan will govern and prevail.
Section 8. Section 83(b) Election. The Participant shall promptly
--------- ----------------------
(and not later than 30 days of the date hereof) notify the Company if the
Participant makes an election under section 83(b) of the Internal Revenue Code.
Section 9. Investment Representation. Upon acquisition of
---------- --------------------------
Restricted Stock under the Plan at a time when there is not in effect a
registration statement under the Securities Act of 1933 relating to the shares
of Common Stock, the Participant hereby represents and warrants, and by virtue
of such acquisition shall be deemed to represent and warrant, to the Company
that the shares of Restricted Stock shall be acquired for investment and not
with a view to the distribution thereof, and not with any present intention of
distributing the same, and the Participant shall provide the Company with such
further representations and warranties as the Company may require in order to
ensure compliance with applicable federal and state securities, blue sky and
other laws. No shares of Restricted Stock shall be acquired unless and until
the Company and/or the Participant shall have complied with all applicable
federal or state registration, listing and/or qualification requirements and all
other requirements of law or of any regulatory agencies having jurisdiction,
unless the Committee has received evidence satisfactory to it that the
Participant may acquire such shares pursuant to an exemption from registration
under the applicable securities laws. Any determination in this connection by
the Committee shall be final, binding, and conclusive. The Company reserves
<PAGE>
the right to legend any certificate for shares of Common Stock, conditioning
sales of such shares upon compliance with applicable federal and state
securities laws and regulations.
Section 10. Changes in Common Stock. Any right of the Participant
---------- -----------------------
or the Company hereunder with respect to the Restricted Stock shall also apply
to any other shares of stock of the Company which such Restricted Stock has been
exchanged or converted into, or which were issued in respect thereof, pursuant
to any recapitalization or other event referred to in Section 3.2 of the Plan,
as determined by the Committee in accordance with the Plan.
Section 11. No Right of Service. Nothing in this Award Agreement
----------- -------------------
shall confer upon the Participant any right to continue as an Independent
Director of the Company or to interfere in any way with the right of the Company
or the shareholders of the Company to terminate the Participant's service on the
Board at any time.
Section 12. Notices. Any notice hereunder by the Participant
----------- -------
shall be given to the Company in writing and such notice shall be deemed duly
given only upon receipt thereof at the Company's office at One PMSC Center,
Blythewood, South Carolina, 29016, or at such other address as the Company may
designate by notice to the President and General Counsel. Any notice hereunder
by the Company shall be given to the Participant in writing and such notice
shall be deemed duly given only upon receipt thereof at such address as the
Participant may have on file with the Company.
Section 13. Construction. The Committee shall have the
----------- ------------
discretionary authority for the interpretation and construction of this Award
Agreement, as and in the manner set forth in Section 4.2 of the Plan.
Section 14. Governing Law. This Award Agreement shall be
----------- --------------
construed and enforced in accordance with the laws of the State of South
Carolina, without giving effect to the choice of law principles thereof.
POLICY MANAGEMENT SYSTEMS CORPORATION
By: ______________________________________
Name: Stephen G. Morrison
Title: Executive Vice President, Secretary &
General Counsel
PARTICIPANT
________________________________________
POLICY MANAGEMENT SYSTEMS CORPORATION
-------------------------------------
RESTRICTED STOCK AWARD AGREEMENT
--------------------------------
Award Agreement, dated as of February 8, 1999 (the "Date of Grant") between
POLICY MANAGEMENT SYSTEMS CORPORATION, a South Carolina corporation (the
"Company"), and ____ (the "Participant"). This Award Agreement is pursuant to
the terms of the Company's Restricted Stock Ownership Plan (the "Plan"). The
applicable terms of the Plan are incorporated herein by reference, including the
definition of terms contained in the Plan.
Section 1. Restricted Stock Award. The Company grants to the Participant,
--------- ----------------------
on the terms and conditions hereinafter set forth, a Restricted Stock Award with
respect to ______ SHARES of the Common Stock of the Company (the "Restricted
Stock").
Section 2. Vesting of Restricted Stock. Subject to Sections 3 and 4
---------- ------------------------------
hereof, the Restricted Stock Award will vest and become payable over a five (5)
year period in 20 percent increments, with the vesting dates being January 1 of
each of the five calendar years following the year in which the Award is made,
provided that the Participant remains as an Employee of the Company on each such
date.
Section 3. Termination of Employment. If the Participant's employment is
---------- -------------------------
terminated by reason of Retirement, Disability or Death, all unvested shares of
Restricted Stock shall become immediately vested and payable. In the event a
Participant voluntarily terminates his employment with the Company prior to full
vesting of any outstanding Award under the Plan, any unvested portion of such
Award will be immediately forfeited. If the employment of a Participant is
terminated by the Company for Cause prior to full vesting of any outstanding
Award, any unvested portion of such Award will be immediately forfeited. If the
employment of a Participant is terminated by the Company other than for Cause
prior to full vesting of any outstanding Award: (I) any unvested portion of a
Stock Uplift included in such Award will be immediately forfeited (applying the
shares covered by the Stock Uplift on a pro-rata basis over the vesting period);
and (ii) any unvested portion of the remainder of the Award shall be immediately
vested and payable.
Section 4. Change of Control. All shares of Restricted Stock shall become
--------- -----------------
fully and immediately vested and payable upon the occurrence of a Change of
Control of the Company prior to any scheduled vesting date as provided in
Section 2 hereof, provided that the Participant remains an Employee of the
Company on the date of the Change in Control.
Section 5. Rights as a Shareholder. Subject to the otherwise applicable
---------- ------------------------
provisions of the Plan and this Award Agreement, the Participant will have all
rights of a shareholder with respect to shares of Restricted Stock granted to
the Participant hereunder, including the right to vote the shares and receive
all dividends and other distributions paid or made with respect thereto.
<PAGE>
Section 6. Restrictions on Transfer. Neither this Award nor any shares of
--------- ------------------------
the Restricted Stock covered hereby may be sold, assigned, transferred,
encumbered, hypothecated or pledged by the Participant, otherwise than to the
Company, unless as of the date of any such sale, assignment, transfer,
encumbrance, hypothecation or pledge, such shares of Restricted Stock to be thus
disposed of have become vested in accordance with this Award Agreement.
Section 7. Award Subject to Plan. This Award and the Restricted Stock
---------- -----------------------
acquired hereunder are subject to the Plan, the terms and provisions of which,
as it may be amended from time to time, are hereby incorporated herein by
reference. In the event of a conflict between any term or provision contained
herein and a term or provision of the Plan, the Plan will govern and prevail.
Section 8. Tax Withholding. The Company's obligation to make payments in
---------- ---------------
respect of Restricted Stock is subject to the making of provision for the
payment or withholding of any taxes from the participant required to be withheld
pursuant to any applicable law in respect of the receipt or lapse of forfeiture
restrictions with respect to such shares. Section 12.4 of the Plan sets forth
provisions relating to tax withholding for Participants subject to Rule 16b-3
promulgated by the United States Securities and Exchange Commission pursuant to
the Securities and Exchange Act of 1934.
Section 9. Section 83(b) Election. The participant shall promptly (and
---------- -----------------------
not later than 30 days of the date hereof) notify the Company if the Participant
makes an election under Section 83(b) of the Internal Revenue Code.
Section 10. Changes in Common Stock. Any right hereunder in respect of
----------- -------------------------
the Company's Common Stock to which the Restricted Stock shall apply in the same
respect to any other shares of stock of the Company into which the Common Stock
has been exchanged or converted into, or which were issued in respect thereof,
pursuant to any recapitalization or other event referred to in Section 3.2 of
the Plan, as determined by the Committee in accordance with the Plan.
Section 11. No Right of Employment. Nothing in this Award Agreement shall
---------- ----------------------
confer upon the Participant any right to continue as an Employee of the Company
or to interfere in any way with the right of the Company or the shareholders of
the Company to terminate the Participant's employment at any time.
Section 12. Notices. Any notice hereunder by the Participant shall be
----------- -------
given to the Company in writing and such notice shall be deemed duly given only
upon receipt thereof at the Company's office at One PMSC Center, Blythewood,
South Carolina, 29016, or at such other address as the Company may designate by
notice to the Participant. Any notice hereunder by the Company shall be given
to the Participant in writing and such notice shall be deemed duly given only
upon receipt thereof at such address as the Participant may have on file with
the Company.
<PAGE>
Section 13. Construction. The Committee shall have the discretionary
----------- ------------
authority for the interpretation and construction of this Award Agreement, as
and in the manner set forth in Section 4.2 of the Plan.
Section 14. Governing Law. This Award Agreement shall be construed and
----------- --------------
enforced in accordance with the laws of the State of South Carolina, without
giving effect to the choice of law principles thereof.
POLICY MANAGEMENT SYSTEMS CORPORATION
By:___________________________
Name: Stephen G. Morrison
Title: Executive Vice President, Secretary &
General Counsel
PARTICIPANT
______________________________
<PAGE>
SCHEDULE OF PARTICULARS
FOR NAMED EXECUTIVE OFFICERS
RE: RESTRICTED STOCK AWARD AGREEMENT
NAMED EXECUTIVE NUMBER
OFFICER GRANTED
Stephen G. Morrison 4,236
Michael W. Risley 1,938
Timothy V. Williams 3,184
G. Larry Wilson 6,731
<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 THREE MONTHS ENDED MARCH 31,
1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 14294
<SECURITIES> 0
<RECEIVABLES> 145755
<ALLOWANCES> 1660
<INVENTORY> 0
<CURRENT-ASSETS> 234233
<PP&E> 270005
<DEPRECIATION> 128740
<TOTAL-ASSETS> 773570
<CURRENT-LIABILITIES> 97772
<BONDS> 0
0
0
<COMMON> 359
<OTHER-SE> 416905
<TOTAL-LIABILITY-AND-EQUITY> 773570
<SALES> 0
<TOTAL-REVENUES> 161475
<CGS> 0
<TOTAL-COSTS> 134888
<OTHER-EXPENSES> 3077
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1282
<INCOME-PRETAX> 22330
<INCOME-TAX> 8262
<INCOME-CONTINUING> 14068
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14068
<EPS-PRIMARY> .39
<EPS-DILUTED> .37
</TABLE>
