UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 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.
35,566,669 Common shares, $.01 par value, as of August 12, 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.
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POLICY MANAGEMENT SYSTEMS CORPORATION
INDEX
Part I is amended in its entirety by the following.
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
<S> <C>
Consolidated Statements of Income for the Three and
Six Months Ended June 30, 1999 and 1998 . . . . . . 3
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998 . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income for the Six
Months Ended June 30, 1999. . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 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 . . 11
Signatures. . . . . . . . . . . . . . . . . . . . . 25
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PART I
FINANCIAL INFORMATION
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues
Licensing . . . . . . . . . . . . . . $ 42,511 $ 29,503 $ 78,463 $ 58,240
Services. . . . . . . . . . . . . . . 129,835 115,386 255,358 227,070
--------- --------- --------- ---------
172,346 144,889 333,821 285,310
--------- --------- --------- ---------
Operating expenses
Cost of revenues
Employee compensation and benefits . 76,385 64,781 150,059 128,089
Computer and communications expenses 11,718 7,932 23,647 15,745
Depreciation and amortization of
property, equipment and
capitalized software costs. . . . . 17,094 15,889 33,251 31,553
Other costs & expenses . . . . . . . 9,345 6,572 16,802 12,809
Selling, general and administrative
expenses. . . . . . . . . . . . . . 28,362 24,851 54,033 48,979
Amortization of goodwill and
other intangibles . . . . . . . . . 3,461 2,489 6,538 4,912
--------- --------- --------- ---------
146,365 122,514 284,330 242,087
--------- --------- --------- ---------
Operating income . . . . . . . . . . . 25,981 22,375 49,491 43,223
Equity in earnings of
unconsolidated affiliates . . . . . 148 233 289 438
Minority interest. . . . . . . . . . . (40) (30) (79) (30)
Other income and expenses:
Investment income. . . . . . . . . . 183 184 414 686
Interest expense and other charges . (2,747) (554) (4,260) (1,481)
--------- --------- --------- ---------
(2,564) (370) (3,846) (795)
--------- --------- --------- ---------
Income from continuing operations
before income taxes. . . . . . . . . 23,525 22,208 45,855 42,836
Income taxes . . . . . . . . . . . . . 8,705 8,226 16,967 15,987
--------- --------- --------- ---------
Income from continuing operations. . . 14,820 13,982 28,888 26,849
Discontinued operations:
Income from operations of
discontinued operations less
applicable income taxes of
$37 and $252, respectively . . . . . - 67 - 389
Loss on disposal of discontinued
operations less applicable income
taxes of $2,439. . . . . . . . . . . - (453) - (453)
--------- --------- --------- ---------
- (386) - (64)
--------- --------- --------- ---------
Net income . . . . . . . . . . . . . . $ 14,820 $ 13,596 $ 28,888 $ 26,785
========= ========= ========= =========
Basic earnings per share:
Income from continuing operations . . $ 0.42 $ 0.38 $ 0.81 $ 0.73
Loss from discontinued operations . . - (0.01) - -
--------- --------- --------- ---------
$ 0.42 $ 0.37 $ 0.81 $ 0.73
========= ========= ========= =========
Diluted earnings per share:
Income from continuing operations . . $ 0.41 $ 0.35 $ 0.77 $ 0.68
Loss from discontinued operations . . - (0.01) - -
--------- --------- --------- ---------
$ 0.41 $ 0.34 $ 0.77 $ 0.68
========= ========= ========= =========
Weighted average common shares . . . . 35,354 36,763 35,739 36,726
Weighted average common shares
assuming dilution. . . . . . . . . . 36,588 39,675 37,460 39,434
<FN>
See accompanying notes
</TABLE>
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<CAPTION>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
June 30, December 31,
1999 1998
------ ------
(In thousands, except share data)
<S> <C> <C>
Assets
Current assets
Cash and equivalents $ 32,828 $ 26,013
Marketable securities 2,197 -
Receivables, net of allowance for uncollectible
amounts of $1,956 ($2,051 at December 31, 1998) 140,090 104,299
Accrued revenues 52,605 45,686
Deferred income taxes 6,605 9,336
Other receivable - 11,279
Prepaids 15,908 8,645
Other 13,202 11,968
--------- ---------
Total current assets 263,435 217,226
Property and equipment, at cost less accumulated
depreciation and amortization of $129,859
($128,363 at December 31, 1998) 145,264 135,436
Accrued revenues 11,345 7,844
Income tax receivable 4,041 4,041
Goodwill and other intangibles, net 102,484 81,401
Capitalized software costs, net 243,134 220,908
Deferred income taxes 24,970 24,787
Investments 10,106 9,661
Cost of acquisition to be allocated 30,804 -
Other 18,694 17,394
--------- ---------
Total assets $854,277 $718,698
========= =========
Liabilities
Current liabilities
Accounts payable and accrued expenses $ 47,184 57,129
Current portion of long-term debt 32,507 15,812
Income taxes payable 17,005 9,202
Unearned revenues 19,857 15,804
Other 946 988
--------- ---------
Total current liabilities 117,499 98,935
Long-term debt 202,000 85,000
Deferred income taxes 101,302 98,233
Other 10,944 3,520
--------- ---------
Total liabilities 431,745 285,688
--------- ---------
Minority interest 604 526
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 56,038 82,396
Retained earnings 388,342 359,454
Accumulated other comprehensive income (12,733) (9,730)
Stock employee compensation trust (10,075) -
--------- ---------
Total stockholders' equity 421,928 432,484
--------- ---------
Total liabilities and stockholders' equity $854,277 $718,698
========= =========
<FN>
See accompanying notes
</TABLE>
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POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
Accumulated 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 . . . . . . . . . . - - 28,888 - - 28,888
Other comprehensive income,
net of tax:
Foreign currency
translation adjustments . . - - - (3,003) - (3,003)
---------
Total comprehensive income. . . 25,885
---------
Purchase of shares for SECT . . - - - - (10,094) (10,094)
Restricted stock vested . . . . - (3) - - 19 16
Stock options exercised
(208,378 shares). . . . . . . 2 6,680 - - - 6,682
Repurchase of 1,013,600 shares
of common stock . . . . . . . (10) (33,035) - - - (33,045)
-------- --------- -------- --------- --------- ---------
BALANCE, JUNE 30, 1999. . . . . $ 356 $ 56,038 $388,342 $(12,733) $(10,075) $421,928
======== ========= ======== ========= ========= =========
<FN>
See accompanying notes
(1) Comprehensive income for the three months ended June 30, 1999 and 1998 was $14,178 and
$12,103, respectively.
Comprehensive income for the six months ended June 30, 1998 was $24,984.
</TABLE>
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POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
-------------------
1999 1998
------ ------
(In thousands)
<S> <C> <C>
Operating Activities
Net income $ 28,888 $ 26,785
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 42,509 39,595
Deferred income taxes 6,240 1,542
Provision for uncollectible accounts (22) 15
Gain on disposal of discontinued operations - (1,986)
Changes in assets and liabilities:
Receivables (28,565) 379
Accrued revenues (10,278) 8,799
Other receivable 11,279 -
Accounts payable and accrued expenses (11,761) (9,589)
Income taxes payable 7,518 9,993
Unearned revenues 1,534 (4,842)
Other, net (14,687) (4,302)
---------- ---------
Cash provided by operations 32,655 66,389
---------- ---------
Investing Activities
Proceeds from sales/maturities of available-for-
sale securities - 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 (20,081) (29,785)
Capitalized internal software development costs (34,553) (28,431)
Business acquisition (67,384) (2,688)
Investment in unconsolidated affiliate 71 -
Investment in minority interest - 425
Proceeds from disposal of property and equipment 305 1,735
Other 1,530 (7,791)
---------- ---------
Cash used by investing activities (120,112) (36,483)
---------- ---------
Financing Activities
Payments on long-term debt (34,971) (41,771)
Proceeds from borrowing under credit facility 165,700 12,500
Purchase of stock for Stock Employee
Compensation Trust (10,094) -
Issuance of common stock under stock option plans 6,682 18,224
Repurchase of common stock (33,045) (26,037)
---------- ---------
Cash provided (used) by financing activities 94,272 (37,084)
---------- ---------
Net increase (decrease) in cash and equivalents 6,815 (7,178)
Cash and equivalents at beginning of period 26,013 32,179
---------- ---------
Cash and equivalents at end of period $ 32,828 $ 25,001
========== =========
Supplemental Information
Interest paid $ 3,211 $ 998
Income taxes paid 4,023 2,725
<FN>
See accompanying notes
</TABLE>
<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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, "Earnings
Per Share". For the Company, the numerator is the same for the calculation of
both basic and diluted EPS. The following is a reconciliation of the
denominator used in the EPS calculations (in thousands):
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<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------- ---------------
1999 1998 1999 1998
----- ----- ----- -----
Weighted Average Shares
- -----------------------
<S> <C> <C> <C> <C>
Basic EPS. . . . . . . . . . . 35,354 36,763 35,739 36,726
Effect of common stock options 1,234 2,912 1,721 2,708
------ ------ ------ ------
Diluted EPS. . . . . . . . . . 36,588 39,675 37,460 39,434
====== ====== ====== ======
</TABLE>
Options to purchase 2,527,640 shares of common stock at a weighted average
price of $37.41 per share were outstanding but not included in the computation
of diluted EPS for the period ending June 30, 1999.
OTHER MATTERS
Certain prior period amounts have been reclassified to conform to current
period presentation.
<PAGE>
NOTE 2. ACQUISITIONS
On June 30, 1999, the Company purchased DORN Technology Group, Inc. ("DORN"), a
Michigan-based risk and claims management company, for $32 million in cash. DORN
owns proprietary claims management software, Riskmaster and Quest, and provides
risk and claims management software and services mainly to the U.S. 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.
The balance sheet reflects approximately $30.8 million as cost of acquisition to
be allocated, once the Company obtains an independent evaluation, and does not
anticipate any significant charge for purchased research and development.
On June 30, 1999, the Company purchased Financial Administrative Services,
Inc.("FAS"), a Connecticut-based provider of business process outsourcing
("BPO") for total consideration of $13 million. 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 Philadelphia-based legal cost containment business for $23.2 million whose
principal indirect investor was Reliance Insurance Company. 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 Statement of Operations of the Company
does not include the results of operations before the date of the acquisition.
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 $260 million and also
seeks treble and punitive damages. The Company has asserted various affirmative
defenses and is pursuing counterclaims against Liberty for breach of contract,
recoupment, breach of good faith and fair dealing, and breach of contract
accompanied by a fraudulent act. The Company is seeking equitable relief,
including injunctive relief, and currently unspecified actual, compensatory and
consequential damages.
<PAGE>
In addition to the litigation described above, there are also various other
litigation proceedings and claims arising in the ordinary course of business.
The Company believes it has meritorious defenses and is vigorously defending
these matters.
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.
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, 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.
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 and six months ended
June 30, 1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ---------------
1999 1998 1999 1998
------ ------ ------ ------
REVENUES FROM EXTERNAL CUSTOMERS
<S> <C> <C> <C> <C>
Property and casualty . . . . . . . . . . . $ 77,077 $ 66,223 $150,715 $133,748
Life and financial solutions. . . . . . . . 47,531 33,336 89,164 63,761
--------- --------- --------- ---------
Total US revenues . . . . . . . . . . . . . 124,608 99,559 239,879 197,509
International . . . . . . . . . . . . . . . 47,738 45,330 93,942 87,801
--------- --------- --------- ---------
Total revenues from
continuing operations. . . . . . . . . $172,346 $144,889 $333,821 $285,310
========= ========= ========= =========
Discontinued operations . . . . . . . . . . $ - $ 4,843 $ - $ 11,968
INCOME (EXPENSE) FROM CONTINUING OPERATIONS
Property and casualty . . . . . . . . . . . $ 20,760 $ 17,673 $ 42,484 $ 35,601
Life and financial solutions. . . . . . . . 10,759 7,612 19,044 14,491
Corporate and US administrative . . . . . . (8,086) (7,187) (16,245) (13,678)
--------- --------- --------- ---------
Total US operating income . . . . . . . . 23,433 18,098 45,283 36,414
--------- --------- --------- ---------
International . . . . . . . . . . . . . . . 4,411 6,375 7,850 10,869
International administrative. . . . . . . . (1,863) (2,098) (3,642) (4,060)
--------- --------- --------- ---------
Total international . . . . . . . . . . . 2,548 4,277 4,208 6,809
--------- --------- --------- ---------
Operating income. . . . . . . . . . . . . 25,981 22,375 49,491 43,223
Equity in earnings of
unconsolidated affiliates . . . . . . . . 148 233 289 438
Minority interest . . . . . . . . . . . . . (40) (30) (79) (30)
Other income and expenses . . . . . . . . . (2,564) (370) (3,846) (795)
Income taxes. . . . . . . . . . . . . . . . 8,705 8,226 16,967 15,987
--------- --------- --------- ---------
Income from continuing operations . . . . $ 14,820 $ 13,982 $ 28,888 $ 26,849
========= ========= ========= =========
Discontinued operations
Property and casualty . . . . . . . . . . - $ (1,018) - $ (1,018)
Life. . . . . . . . . . . . . . . . . . . - 3,112 - 3,672
Other income and expenses . . . . . . . . - (4) - (27)
Income taxes. . . . . . . . . . . . . . . - (2,476) - (2,691)
--------- --------- --------- ---------
Discontinued operations, net. . . . . . . $ - $ (386) $ - $ (64)
========= ========= ========= =========
</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 Six Three Six
Months Ended Months Ended Months Months
June 30, June 30, Ended Ended
------------ ----------
1999 1998 1999 1998 June 30
----- ----- ----- ----- -----------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Licensing . . . . . . . . . . . . . 24.7% 20.4% 23.5% 20.4% 44.1% 34.7%
Services. . . . . . . . . . . . . . 75.3 79.6 76.5 79.6 12.5 12.5
------ ------ ------ ------
100.0 100.0 100.0 100.0 19.0 17.0
------ ------ ------ ------
Operating expenses
Cost of revenues
Employee compensation and benefits 44.3 44.7 45.0 44.9 17.9 17.2
Computer & communication expenses. 6.8 5.5 7.1 5.5 47.7 50.2
Depreciation & amortization
of property, equipment &
capitalized software costs. . . . 9.9 11.0 10.0 11.1 7.6 5.4
Other costs & expenses . . . . . . 5.4 4.5 5.0 4.5 42.2 31.2
Selling, general &
administrative expenses . . . . . 16.5 17.2 16.2 17.2 14.1 10.3
Amortization of goodwill and
other intangibles . . . . . . . . 2.0 1.7 2.0 1.7 39.1 33.1
------ ------ ------ ------
84.9 84.6 85.3 84.9 19.5 17.5
------ ------ ------ ------
Operating income . . . . . . . . . . 15.1 15.4 14.7 15.1 16.1 14.5
Equity in earnings of unconsolidated
affiliates. . . . . . . . . . . . 0.1 0.2 0.1 0.2 (36.5) (34.0)
Other income and expenses. . . . . . (1.5) (0.2) (1.2) (0.3) 593.0 383.8
------ ------ ------ ------
Income from continuing operations
before income taxes. . . . . . . . 13.7 15.4 13.6 15.0 5.9 7.0
Income taxes . . . . . . . . . . . . 5.1 5.7 5.1 5.6 5.8 6.1
------ ------ ------ ------
Income from continuing operations. . 8.6 9.7 8.5 9.4 6.0 7.6
Discontinued operations, net . . . . - (0.3) - - 100.0 100.0
------ ------ ------ ------
Net income . . . . . . . . . . . . . 8.6% 9.4% 8.5% 9.4% 9.0% 7.9%
====== ====== ====== ======
</TABLE>
<PAGE>
THREE MONTH COMPARISON
REVENUES
<TABLE>
<CAPTION>
Three Months
Ended June 30,
--------------
Licensing 1999 1998 Change
----- ----- ------
(Dollars in millions)
<S> <C> <C> <C>
Initial charges. . . . . . . $25.6 $13.0 97%
Monthly charges. . . . . . . 16.9 16.5 3
------ ------
$42.5 $29.5 44%
====== ======
Percentage of total revenues 25% 20%
------ ------
</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 $12.6 million for the second quarter of
1999 compared with the second quarter of 1998, with the following increases by
business segment: property and casualty up 306% ($10.0 million); life and
financial solutions up 50% ($1.9 million); and international up 12% ($0.7
million).
Initial license charges for the second quarter of 1999 include right-to-use
licenses of $5.3 million. This compares with $2.1 million in right-to-use
licenses for the second 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 to be
minimal in the future.
Second quarter 1999 initial license charges include $2.0 million of
licenses to the former owners of FAS, a BPO company acquired at the end of the
second quarter.
Two remarketing agreements for Claim Outcome Adviser ("COA") totaling $3.5
million are included in initial licensing revenue for the second quarter of
1999. These non-exclusive agreements provide two of the Company's nationally
recognized vendors the right to relicense COA to the self-insured market. The
Company also renegotiated with one of these vendors an extension to its
long-term license agreement for operating software used in the Company's data
center.
Initial license charges for the 1999 second quarter include $1.7 million of
revenue from the sale of hardware remarketed by the Company in conjunction with
licenses of its software.
<PAGE>
Monthly license charges were basically flat for the second quarter of 1999
compared with the second quarter of 1998 with the following increases or
decreases by business segment: property and casualty down 16% ($1.4 million)
due to weak 1998 licensing and the effect of right-to-use licenses; life and
financial solutions up 45% ($1.5 million) on strong 1998 initial license
activity; and international up 7% ($0.3 million)principally due to increased
licensing revenues in the Asia/Pacific region.
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
----------- -------------------------- -----------
2nd 1st 4th 3rd 2nd 1st 4th 3rd
----------- -------------------------- -----------
(Dollars in millions)
Initial license revenues $25.6 $18.7 $27.3 $14.7 $13.0 $12.6 $25.1 $16.9
% of total revenues 15% 12% 16% 10% 9% 9% 17% 13%
<TABLE>
<CAPTION>
Three Months
Ended June 30,
--------------
Services 1999 1998 Change
----- ----- ------
(Dollars in millions)
<S> <C> <C> <C>
Professional and outsourcing $128.0 $114.1 12%
Other. . . . . . . . . . . . 1.8 1.3 38
------- -------
$129.8 $115.4 13%
======= =======
Percentage of total revenues 75% 80%
------- -------
</TABLE>
Professional and outsourcing services revenues increased $13.9 million for the
second quarter of 1999 compared with the second quarter of 1998, with the
following increases by business segment: property and casualty up 2% ($1.3
million) with strong growth in the Company's Point product related services and
outsourcing offset by the effect of weak 1998 licensing of the Company's S3+ and
the redeployment of staff from customer's Y2K projects ending late last year;
life insurance and financial solutions up 42% ($10.9 million) due to strong 1998
initial licensing activity particularly in banking; and international up 5%
($1.7 million) due principally to strong growth in the Nordic region being
offset by decreases in the UK, Canada and Asia/Pacific region.
The Company believes that there is an increasing rate of change in technology
and in its marketplace due to the internet and the rapid adoption of e-commerce.
In response to these changes the Company has commenced the process of
reassessing and challenging all major aspects of its business for the purpose of
evaluating whether it is correctly positioned to maximize its potential. The
results of this process and the impact, if any, on the Company's results of
operations are unknown at this time.
<PAGE>
OPERATING EXPENSES
COST OF REVENUES
Employee compensation and benefits increased 18% for the second quarter of
1999 compared with the second 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, second
quarter 1999 employee compensation and benefits would have increased 21%
compared with the same period last year. Compensation and benefits increased
15% ($2.9 million) internationally and 19% ($8.7 million) domestically.
Computer and communications expenses increased 48% for the second quarter of
1999 compared with the second quarter of 1998. However, at the beginning of the
third quarter of 1998, the Company entered into a data center outsourcing
agreement with Lockheed Martin. As a result, certain costs previously included
in employee compensation and benefits are now included in computer and
communications expense. Had these employee costs not been transferred, second
quarter 1999 computer and communication expense would have increased 26% by
comparison with 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 data center operating
software.
Depreciation of property and equipment increased 5% for the second quarter
of 1999 compared with the second quarter of 1998. Several elements within this
line have fluctuated, but none are individually significant.
Amortization of capitalized software costs increased 10% for the second quarter
of 1999 compared with the second quarter of 1998 due to various releases of the
Company's internally developed software products.
Other operating costs and expenses increased 42% for the second quarter of
1999 compared with the second quarter of 1998, principally due to the inclusion
of $1.6 million of costs for computer hardware sold to customers in conjunction
with software licenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 14% for the second
quarter of 1999 compared with the second quarter of 1998, but declined slightly
as a percentage of revenue. Several elements within this line have fluctuated,
but none are individually significant.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles increased 39% for the second
quarter of 1999 compared with the second quarter of 1998, principally due to
<PAGE>
increased amortization related to the acquisition of The Leverage Group, Inc. in
the third quarter of 1998 and Legalgard in the first quarter of 1999,
amortization of deferred costs associated with the Lockheed Martin data center
outsourcing arrangement and contingent consideration related to prior
acquisitions in Europe.
OPERATING INCOME
1999 second quarter operating income increased 16% compared with the 1998
second quarter. Increases or decreases in segment operating income were:
property and casualty increased 17%, life and financial solutions increased 41%
and international decreased 31%. The increase in domestic operating income is
primarily related to increases in initial licensing revenue, professional
services and outsourcing revenues being somewhat offset by higher operating
costs which increased at a slower rate than the related revenue. The decrease in
international operating income is primarily due to increased professional
services expenses, which grew at a faster rate than the related revenues.
OTHER INCOME AND EXPENSE
Other income and expense is comprised primarily of interest expense which
increased $2.2 million for the second quarter of 1999 compared with the second
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. The average
nominal interest rate applicable to borrowings under the Company's credit
facilities during the second quarter of 1999 was 5.2%.
INCOME TAXES
The effective income tax rate (income taxes expressed as a percentage of pre-tax
income) was 37.0% for the second quarters of 1999 and 1998. The effective rate
for the second quarter of 1999 is higher than the federal statutory rate
principally due to the effect of state and local income taxes.
DISCONTINUED OPERATIONS
During the second quarter of 1998, the Company sold its life information
services segment.
<PAGE>
SIX MONTH COMPARISON
REVENUES
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------
Licensing 1999 1998 Change
----- ----- ------
(Dollars in millions)
<S> <C> <C> <C>
Initial charges. . . . . . . $44.3 $25.6 73%
Monthly charges. . . . . . . 34.2 32.6 5
------ ------
$78.5 $58.2 35%
====== ======
Percentage of total revenues 24% 20%
------ ------
</TABLE>
Initial license revenues increased $18.7 million for the first six months
of 1999 compared with the first six months of 1998, with the following increases
by business segment: property and casualty up 186% ($15.7 million); life and
financial solutions up 29% ($2.0 million); and international up 9% ($1.0
million).
Initial license charges for the first six months of 1999 include right-to-use
licenses of $11.4 million compared with $7.0 million for the first six 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 to be minimal in the future.
1999 six month initial license charges include a $2.9 million license to
the former owners of Legalgard. In addition, the former owners of FAS, a BPO
company acquired at the end of the second quarter, licensed several of the
Company's life and financial solutions products for $2.0 million.
Two remarketing agreements for COA, totaling $3.5 million, are included in
initial licensing revenues for the first six 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 with
one of these vendors an extension to its long-term license agreement for
operating software used in the Company's data center.
1999 six month license charges include $2.1 million of revenue from the sale of
hardware remarketed by the Company in conjunction with licenses of its software.
Monthly license charges increased $1.6 million for the first six months of
1999 compared with the first six months of 1998 with the following increases or
decreases by business segment: property and casualty down 15% ($2.7 million)
due to weak 1998 licensing and the effect of right-to-use licenses; life and
financial solutions up 49% ($3.3 million) on strong 1998 initial license
activity; and international up 12% ($1.0 million) principally due to increased
licensing revenues in the Asia/Pacific region.
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------
Services 1999 1998 Change
----- ----- ------
(Dollars in millions)
<S> <C> <C> <C>
Professional and outsourcing $253.3 $224.9 13%
Other. . . . . . . . . . . . 2.1 2.2 (5)
------- -------
$255.4 $227.1 13%
======= =======
Percentage of total revenues 77% 80%
------- -------
</TABLE>
Professional and outsourcing services revenues increased $28.4 million for the
first six months of 1999 compared with the first six months of 1998, with the
following increases by business segment: property and casualty up 3% ($3.3
million); life insurance and financial solutions up 41% ($20.3 million); and
international up 7% ($4.8 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. 1999 six month 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 six months
of 1999 compared with the first six months 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. Had these
employee costs not been transferred, 1999 six month employee compensation and
benefits would have increased 20% by comparison with the same period last year.
Compensation and benefits increased 21% ($7.9 million) internationally and 16%
($14.1 million) domestically.
Computer and communications expenses increased 50% for the first six months of
1999 compared with the first six months of 1998. At the beginning of the third
quarter of 1998, the Company entered into a data center outsourcing agreement
with Lockheed Martin. As a result, certain costs previously included in
employee compensation and benefits are now included in computer and
communications expense. Had these employee costs not been transferred, second
quarter 1999 computer and communication expense would have increased 29% by
comparison with 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 data center operating
software.
Depreciation of property and equipment remained relatively unchanged for
the first six months of 1999 compared with the first six months of 1998.
<PAGE>
Amortization of capitalized software costs increased 7% for the first six months
of 1999 compared with the first six months of 1998 due to various releases of
the Company's internally developed software products.
Other operating costs and expenses increased 31% for the first six months
of 1999 compared with the first six months of 1998, principally due to the
inclusion of $1.9 million of costs for computer hardware sold to customers in
conjunction with software licenses. The corresponding revenue is included in
initial licensing revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 10% for the first
six months of 1999 compared with the first six months of 1998, but declined
slightly as a percentage of revenue. Several elements within this line have
fluctuated, but none are individually significant.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles increased 33% for the first
six months of 1999 compared with the first six months of 1998, principally due
to increased amortization related to the acquisition of The Leverage Group, Inc.
in the third quarter of 1998 and Legalgard in the first quarter of 1999,
amortization of deferred costs associated with the Lockheed Martin data center
outsourcing arrangement and contingent consideration related to prior
acquisitions in Europe.
OPERATING INCOME
1999 six month operating income increased 15% compared with 1998 six month
operating income. Increases or decreases in segment operating income were:
property and casualty increased 19%, life and financial solutions increased 31%
and international decreased 28%. 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.
OTHER INCOME AND EXPENSE
Other income and expense is comprised primarily of interest expense which
increased $3.1 million for the first six months of 1999 compared with the first
six 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 six months of 1999 was
5.2%.
<PAGE>
INCOME TAXES
The effective income tax rate (income taxes expressed as a percentage of pre-tax
income) was 37.0% and 37.3% for the first six months of 1999 and 1998,
respectively. The effective rate for the first six months of 1999 is higher
than the federal statutory rate principally due to the effect of state and local
income taxes.
DISCONTINUED OPERATIONS
During the second quarter of 1998, the Company sold its life information
services segment.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
- -----------------------------------------------------
(Dollars in millions)
<S> <C> <C>
Cash and equivalents, marketable
securities, and investments. . $ 45.1 $ 35.7
Current assets . . . . . . . . . 263.4 217.2
Current liabilities. . . . . . . 117.5 98.9
Working capital. . . . . . . . . 145.9 118.3
Long-term debt . . . . . . . . . 202.0 85.0
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
- ---------------------------------------------------------------
(Dollars in millions)
<S> <C> <C>
Cash provided by operations. . . . . . . . . $ 32.7 $ 66.4
Cash (used) by investing activities. . . . . (120.1) (36.5)
Cash provided (used) by financing activities 94.3 (37.1)
</TABLE>
The Company's current ratio (current assets divided by current liabilities)
stood at 2.2 at June 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
June 30, 1999, the Company had $200 million of committed and $40 million of
uncommitted credit facilities available to it, of which $231.0 million had been
utilized. In July 1999, the Company increased its committed facilities to $240
million and reduced its uncommitted facilities to $20 million, resulting in a
$20 million net increase in borrowing capacity which increased its total credit
facilities to $260 million.
During the six months ended June 30, 1999 the Company capitalized software
development costs of $34.6 million, principally related to the development of
its property and casualty, life and international enterprise software products
and e-commerce and banking solutions.
<PAGE>
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. In response to these changes the Company has
commenced the process of reassessing and challenging all major aspects of its
business for the purpose of evaluating whether it is correctly positioned to
maximize its potential. The results of this process and the impact, if any, on
the Company's results of operations are unknown at this time. 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.
<PAGE>
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 to be minimal in the
future.
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. Testing components that were repaired. Such tests include both
system tests and integrated tests in test environments with machine dates
advanced to reflect dates in the years 1999 and 2000.
Implementation. Migrating systems, applications, and hardware to production
environments, installation of replacement systems and the retirement of
designated components, as well as finalizing, documenting and taking care of
residual activities. This phase also includes the compilation and retention of
supporting documentation that conforms to prescribed corporate standards.
Significant progress has been made in all project phases, and the project
is scheduled for completion during the third quarter of 1999. After completion
of the project, the Company plans to continue to remediate products based on
vendor compliance updates 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 the century boundary. Current testing has confirmed the
ability of the applications to process data in both centuries. Additional
testing on the Company's base products has been completed during the first half
of 1999 in an environment that utilizes accelerated system dates (Year 2000
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") 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 our
customer products and additional redundant testing will continue to occur in
Year 2000 time machine environments until year end 1999. 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, 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 was substantially completed by June 30, 1999, with minor
issues scheduled for completion by the end of the third quarter. Regardless of
project completion dates, the Company will continue to retest hardware and
software until year end 1999.
In 1996, the Company commenced the process of identifying, selecting and
implementing an enterprise wide financial and human resources system to replace
its existing systems. The financial components of the selected solution are
operational and the human resources functionality is currently scheduled to be
fully operational during the third quarter of 1999. This selected solution
meets Year 2000 requirements.
The Company has inventoried and assessed its networks and PC hardware and
software and has identified Year 2000 remediation upgrades that are required. As
a secondary measure, an internal test lab for verification of vendor claims of
Year 2000 compliance for core systems and mission critical products was
established. Remediation efforts of internal systems are schedule to be
completed by October, 1999.
The Company has also assessed readiness with respect to 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 substantially completed this phase of its Year 2000 readiness
project.
Year 2000 Costs
- -----------------
Since 1993, the Company estimates that it has incurred approximately $17.4
million of costs in addressing Year 2000 remediation issues and will anticipate
spending approximately $1.5 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 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.
<PAGE>
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 whether the
consequences of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition. The Year 2000 Project
is expected to significantly reduce the Company's level of uncertainty about the
Year 2000 problem and, in particular, about the Year 2000 compliance and
readiness of its mission critical suppliers and trading partners. The Company
believes that, with the implementation of new business systems and completion of
the Project as scheduled, the possibility of significant interruptions of normal
operations should be reduced.
The Company is in the process of finalizing contingency plans to minimize the
effect of such 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>
POLICY MANAGEMENT SYSTEMS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POLICY MANAGEMENT SYSTEMS CORPORATION
-------------------------------------
(Registrant)
Date: August 23, 1999 Timothy V. Williams
Executive Vice President
(Chief Financial Officer)
