UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2000
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.
35,585,504 Common shares, $.01 par value, as of August 4, 2000.
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/A for the year ended December 31, 1999.
1
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POLICY MANAGEMENT SYSTEMS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
<S> <C>
Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 2000 and 1999 . . . . . . . . 3
Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999 . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income for the Six
Months Ended June 30, 2000. . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999 . . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . 37
Item 6. Exhibits and Reports on Form 8-K. . . . . . . 37
Signatures. . . . . . . . . . . . . . . . . . . . . . . 38
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<CAPTION>
PART I
FINANCIAL INFORMATION
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
2000 1999 2000 1999
------ ------ ------ -----
(In thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES
Licensing. . . . . . . . . . . . . . . $ 26,207 $ 43,697 $ 52,507 $ 78,463
Services . . . . . . . . . . . . . . . 113,867 129,834 235,909 255,357
--------- --------- --------- ---------
140,074 173,531 288,416 333,820
--------- --------- --------- ---------
OPERATING EXPENSES
Cost of revenues
Employee compensation and benefits. . 75,190 76,385 154,510 150,043
Computer and communications expenses. 13,861 11,717 27,512 23,646
Depreciation and amortization of
property, equipment and
capitalized software costs . . . . . 22,574 17,094 37,268 33,251
Other costs & expenses. . . . . . . . 9,675 9,422 21,978 16,838
Selling, general and administrative
expenses . . . . . . . . . . . . . . 26,606 28,362 54,820 53,934
Amortization of goodwill and
other intangibles. . . . . . . . . . 3,784 3,461 7,169 6,538
Restructuring and other charges. . . . 3,255 - 16,027 -
Merger termination charges . . . . . . 24,347 - 24,347 -
--------- --------- --------- ---------
179,292 146,441 343,631 284,250
--------- --------- --------- ---------
OPERATING (LOSS) INCOME . . . . . . . . (39,218) 27,090 (55,215) 49,570
Equity in earnings of
unconsolidated affiliates. . . . . . 270 148 711 288
Minority interest . . . . . . . . . . . 21 (40) 39 (78)
Other income and expenses:
Investment income . . . . . . . . . . 3,698 183 6,076 435
Interest expense and other charges. . (6,795) (2,747) (13,478) (4,240)
--------- ---------- --------- ---------
(3,097) (2,564) (7,402) (3,805)
--------- ---------- --------- ---------
(Loss) income before income taxes . . . (42,024) 24,634 (61,867) 45,975
Income tax expense (benefit). . . . . . 863 9,122 (6,838) 17,012
--------- ---------- --------- ---------
NET (LOSS) INCOME . . . . . . . . . . . $(42,887) $ 15,512 $(55,029) $ 28,963
========= ========= ========= =========
BASIC (LOSS) EARNINGS PER SHARE . . . . $ (1.21) $ 0.44 $ (1.56) $ 0.81
========= ========= ========= =========
DILUTED (LOSS) EARNINGS PER SHARE . . . $ (1.21) $ 0.42 $ (1.56) $ 0.77
========= ========= ========= =========
Weighted average common shares. . . . . 35,380 35,354 35,378 35,739
Weighted average common shares
assuming dilution . . . . . . . . . . 35,380 36,584 35,378 37,458
<FN>
See accompanying notes
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POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
June 30, December 31,
2000 1999
------ ------
(In thousands, except share data)
<S> <C> <C>
Assets
Current assets
Cash and equivalents $ 20,552 $ 17,744
Receivables, net of allowance for uncollectible
amounts of $5,353 ($13,000 at December 31, 1999) 102,714 99,669
Accrued revenues 24,889 36,393
Deferred income taxes 17,427 15,979
Income tax receivable 12,622 9,728
Other receivable - 7,788
Prepaids 6,751 12,050
Other 16,209 12,648
--------- ---------
Total current assets 201,164 211,999
Property and equipment, at cost less accumulated
depreciation and amortization of $126,144
($132,347 at December 31, 1999) 136,835 142,867
Accrued revenues 24,296 16,130
Income tax receivable 4,041 4,041
Goodwill and other intangibles, net 105,818 111,024
Capitalized software costs, net 155,099 155,896
Deferred income taxes 29,327 29,850
Investments 5,921 13,332
Other 19,684 21,149
--------- ---------
Total assets $682,185 $706,288
========= =========
Liabilities
Current liabilities
Accounts payable and accrued expenses $ 43,123 41,236
Notes payable 21,000 -
Current portion of long-term debt 238,000 4,000
Income taxes payable 4,128 4,616
Unearned revenues 24,148 20,290
Accrued restructuring and other charges 5,113 3,630
Other 1,881 2,223
--------- ---------
Total current liabilities 337,393 75,995
Long-term debt - 227,000
Deferred income taxes 72,207 68,514
Accrued restructuring and other charges 3,077 2,659
Other 8,777 9,935
--------- ---------
Total liabilities 421,454 384,103
--------- ---------
Minority interest 593 624
Stockholders' equity
Special stock, $.01 par value, 5,000,000 shares
authorized - -
Common stock, $.01 par value, 75,000,000 shares
authorized, 35,585,581 shares issued and
outstanding (35,585,078 at December 31, 1999) 356 356
Additional paid-in capital 56,809 56,695
Retained earnings 232,454 287,483
Accumulated other comprehensive income (19,783) (12,972)
Stock employee compensation trust (9,698) (10,001)
--------- ---------
Total stockholders' equity 260,138 321,561
--------- ---------
Total liabilities and stockholders' equity $682,185 $706,288
========= =========
<FN>
See accompanying notes
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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, 1999. . $ 356 $56,695 $287,483 $ (12,972) $(10,001) $321,561
Comprehensive income
Net (loss) income. . . . . . - - (55,029) - - (55,029)
Other comprehensive income,
net of tax:
Foreign currency
translation adjustments . - - - (6,811) - (6,811)
-------
Total comprehensive income. . (61,840)
---------
Restricted stock. . . . . . . - 92 - - 303 395
Stock options exercised
(1,168 shares). . . . . . . - 22 - - - 22
--------- ------- --------- ------------------ ----- ---------
BALANCE, JUNE 30, 2000. . . . $ 356 $56,809 $232,454 $ (19,783) $ (9,698) $260,138
========= ======= ========= ============= ========= =========
<FN>
See accompanying notes
(1) Comprehensive (loss) income for the three months ended June 30, 2000 and 1999 was $(45,227)
and $14,178, respectively.
Comprehensive income for the six months ended June 30, 1999 was $25,960.
</TABLE>
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<CAPTION>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
---------------------
2000 1999
------ ------
(In thousands)
<S> <C> <C>
Operating Activities
Net (loss) income $ (55,029) $ 28,963
Adjustments to reconcile net (loss) income to net
cash (used) provided by operating activities:
Depreciation and amortization 47,970 42,509
Deferred income taxes 2,768 6,285
Provision for uncollectible accounts 1,444 (22)
Loss on disposal of property and equipment. . . 224 305
Gain on sale of investments (5,298) -
Changes in assets and liabilities:
Receivables (5,710) (9,437)
Accrued revenues 3,338 (29,407)
Other receivable 7,788 11,279
Accounts payable and accrued expenses 1,051 (12,010)
Accrued restructuring and other charges 2,724 -
Income taxes (3,382) 7,518
Unearned revenues 3,858 1,534
Other, net (3,049) (14,071)
---------- ----------
Cash (used) provided by operations (1,303) 33,446
---------- ----------
Investing Activities
Acquisition of property and equipment (9,634) (20,596)
Capitalized internal software development costs (24,377) (34,553)
Business acquisition and investments (6,816) (67,313)
Proceeds from sale of investments . . . . . . . . 17,199 -
Other 2,705 1,530
---------- ----------
Cash used by investing activities (20,923) (120,932)
---------- ----------
Financing Activities
Payments on long-term debt (145,000) (34,971)
Proceeds from borrowing under credit facility 154,000 165,700
Purchase of stock for Stock Employee
Compensation Trust - (10,094)
Issuance of common stock under stock option plans 22 6,682
Proceeds from note payable. . . . . . . . . . . . 19,000
Repurchase of common stock - (33,045)
Other (2,988) 29
---------- ----------
Cash provided by financing activities 25,034 94,301
---------- ----------
Net increase in cash and equivalents 2,808 6,815
Cash and equivalents at beginning of period 17,744 26,013
---------- ----------
Cash and equivalents at end of period $ 20,552 $ 32,828
========== ==========
Supplemental Information
Interest paid $ 6,206 $ 3,211
Income taxes (refunded) paid (4,613) 4,023
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POLICY MANAGEMENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
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/A.
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, for the three and six months ended June 30, 2000, as
the net loss generated in those periods would cause the inclusion of common
stock options to be anti-dilutive. The average market price of the stock for
the period was below the exercise price for the majority of options outstanding
during the period. 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,
----------------- -----------------
2000 1999 2000 1999
----- ----- ----- -----
Weighted Average Shares
-------------------------
<S> <C> <C> <C> <C>
Basic EPS. . . . . . . . . . . 35,380 35,354 35,378 35,739
Effect of common stock options - 1,230 - 1,719
------ ------ ------ ------
Diluted EPS. . . . . . . . . . 35,380 36,584 35,378 37,458
====== ====== ====== ======
</TABLE>
Options to purchase 6,367,769 shares of common stock at a weighted average
price of $31.52 per share were outstanding but not included in the computation
of diluted EPS for the period ending June 30, 2000.
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OTHER MATTERS
Certain prior period amounts have been reclassified to conform to current period
presentation.
NOTE 2. ACQUISITIONS
On May 31, 2000, the Company purchased DEKRU B.V., a Dutch subsidiary of
the German based DEKRA Group ("DEKRU"), for approximately $1.1 million in cash
plus additional consideration of up to $6.1 million contingent upon the future
performance of DEKRU to be recorded as royalty expense as incurred. DEKRU owns a
software product (KDX) for managing and adjusting automobile claims. The
Company intends to market and further develop KDX primarily for the European
market.
On June 30, 1999, the Company purchased DORN Technology Group, Inc. ("DORN"), a
risk and claims management company, for $33.2 million in cash plus additional
consideration based upon the performance of DORN. Pursuant to an amendment to
this agreement in the 2000 second quarter, this additional consideration was
limited to $1.1 million and was recorded as compensation expense in 1999 and the
first half of 2000. DORN owns the Riskmaster claims management software and
Quest healthcare facility software, and provides risk and claims management
software and services mainly to the US self-insured market. The Company intends
to grow DORN's business and further develop the Riskmaster and Quest systems to
complement its existing claims products.
On June 30, 1999, the Company purchased Financial Administrative Services,
Inc.("FAS"), a provider of business process outsourcing ("BPO") for $13.0
million plus additional consideration of up to $12.0 million contingent on the
future performance of FAS, to be capitalized as additional goodwill when paid
until 2005. FAS uses the Company's PolicyLink system to support the rapid
introduction of variable insurance products and annuities in a business process
outsourcing environment. The Company intends to grow the business acquired.
On March 31, 1999, the Company purchased Legalgard Partners, L.P.
("Legalgard"), a legal cost containment business for $23.2 million plus
additional consideration of up to $4.3 million contingent upon the future
performance of Legalgard, to be recorded as compensation expense as incurred
until 2003. Legalgard provides legal cost containment services mainly to the US
property and casualty insurance industry using the Counsel Partnership System, a
proprietary software system. The Company intends to continue growing
Legalgard's existing services business and developing the technology acquired.
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.
8
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NOTE 3. CONTINGENCIES
On June 9, 2000, the Company and Chase Manhattan Mortgage Corporation
("Chase") entered into a confidential settlement of previously disclosed
litigation. (See Item 1, Legal Proceedings, of Part II contained in the
Company's report on Form 10-Q for the quarter ended March 31, 2000). As part of
the settlement, the Company and Chase agreed to release each other from all
claims asserted and the lawsuit was dismissed. The amount of settlement was
placed in escrow and accrued as an expense in the first quarter of 2000.
In January 2000, Computer Sciences Corporation ("CSC") filed a complaint against
the Company alleging that the Company and NeuronWorks, an entity retained by the
Company in the development of Claims Outcome Advisor ("COA"), misappropriated
CSC's trade secrets related to CSC's Colossus product and used such trade
secrets in the development of the Company's COA product. The litigation was
removed from Texas State court and is currently pending in the United States
District Court for the Western District of Texas, Austin Division. CSC's
complaint alleges unfair competition, product misappropriation, trade secret
theft, tortuous interference with existing and prospective contracts, aiding and
abetting breach of fiduciary duty, and civil conspiracy. CSC's complaint seeks
preliminary and permanent injunctive relief, damages, attorneys' fees and
punitive damages, all in an unspecified amount. The Company has denied the
allegations against it and asserted various affirmative defenses and
counterclaims against CSC, including counterclaims for unfair trade practices,
false representation, false promotion and commercial disparagement under the
Lanham Act, business disparagement, injurious falsehood, defamation, and
tortuous interference with existing and prospective contractual and business
relationships. On March 22, 2000, a hearing was held on CSC's request for
preliminary injunctive relief to enjoin the Company from marketing and licensing
COA. CSC's request for preliminary injunctive relief was denied. The case has
been set for trial in December 2000. The Company believes CSC's remaining
claims are without merit and is vigorously defending this matter and pursuing
relief on the Company's claims.
On May 22, 2000 an amended consolidated complaint was filed in the
previously disclosed purported class action filed on behalf of purchasers of the
Company's stock during the period October 22, 1998 and February 10, 2000. (See
Item 1, Legal Proceedings, of Part II contained in the Company's report on Form
10-Q for the quarter ended March 31, 2000). The defendants have filed a motion
to dismiss the complaint and intend to vigorously pursue a full defense of the
action.
9
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Also on May 22, 2000, an amended complaint was filed in the previously disclosed
purported class action brought by one of the Company's employees, suing
allegedly on behalf of herself and all former or current participants in the
Company's 401(k) Retirement Savings Plan ("Plan") during the period October 22,
1998 through February 10, 2000, against the Company, its Chairman and three
members of the Administrative Committee of the Plan. The amended complaint
alleges that the Plan's investment in the Company's stock violated Sections 502
(a) (2) and (3) of ERISA and constituted a breach of fiduciary duty given
defendants' alleged knowledge that the Company's stock price was artificially
inflated throughout the class period as a result of the same series of alleged
materially false and misleading statements that form the basis of the securities
class action described above. The court has entered an order providing for the
coordination of proceedings with the securities class action. The defendants
have filed a motion to dismiss the complaint and intend to vigorously pursue a
full defense of this action.
As previously disclosed, between March 31, 2000 and May 5, 2000 four
purported class actions were filed against the Company and its directors in the
Court of Common Pleas in Richland County, South Carolina. (See Item 1, Legal
Proceedings, of Part II contained in the Company's report on Form 10-Q for the
quarter ended March 31, 2000). These actions were consolidated into a single
action and an amended consolidated complaint was filed on July 24, 2000. The
amended consolidated complaint alleges that the defendants breached their
fiduciary duties by failing to conduct a market check and agreeing to an
unreasonable termination fee in the June 20, 2000 Agreement and Plan of Merger
between the Company and Computer Sciences Corporation (CSC transaction) and
breached their duty of candor in failing to disclose material information
concerning the CSC transaction. The plaintiffs seek preliminary and permanent
injunctive relief to enjoin payment of the termination fee under the Agreement
and Plan of Merger between Politic Acquisition Corp. and the Company (Welsh
Carson transaction) which was terminated by the Company. Plaintiffs also seek
to enjoin consummation of the CSC tender offer until additional disclosures are
made, to strike the termination fee in the CSC transaction, and seek reasonable
attorney fees and costs. The plaintiffs' request for a temporary injunction was
denied on August 7, 2000 following a hearing on plaintiffs' request. Defendants
have filed a motion to dismiss the amended complaint and intend to vigorously
pursue a full defense of this action.
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.
In a letter dated April 29, 1999, the Company was notified by 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 has submitted a
response to the IRS and is awaiting a formal response. Furthermore, the Company
strongly disagrees with the proposed adjustments and is vigorously defending its
position.
10
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Resolution of any of the above matters could have a material adverse effect
on the results of operations and consolidated financial position of the Company
in future periods. While the Company does not expect these matters to have a
material adverse effect in future periods it is unable to predict the ultimate
outcome or the potential financial impact of these matters.
11
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NOTE 4. SEGMENT INFORMATION
The Company's operating segments are the four 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. Claims and risk management (generally referred to as "claims"). This segment
provides software products, product support, professional services and
outsourcing primarily to the claims management function of the US insurance
industry and risk management, i.e. self-insured, marketplace. Prior to the 2000
first quarter, claims was included in the property and casualty segment.
3. 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.
4. 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.
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Information about the Company's operations for the three and six months ended
June 30, 2000 and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
2000 1999 2000 1999
------ ------ ------ ------
REVENUES FROM EXTERNAL CUSTOMERS
<S> <C> <C> <C> <C>
Property and casualty. . . . . . . $ 50,052 $ 70,321 $104,503 $141,145
Claims.. . . . . . . . . . . . . . 6,065 6,756 13,382 9,623
Life and financial solutions . . . 46,844 47,531 94,712 89,165
--------- --------- --------- ---------
Total US revenues. . . . . . . . 102,961 124,608 212,597 239,933
International. . . . . . . . . . . 37,113 48,923 75,819 93,887
--------- --------- --------- ---------
Total revenues . . . . . . . . . $140,074 $173,531 $288,416 $333,820
========= ========= ========= =========
INCOME (LOSS) FROM OPERATIONS
Property and casualty. . . . . . . $ 4,236 $ 17,588 $ 9,425 $ 37,178
Claims.. . . . . . . . . . . . . . (1,717) 3,297 (3,001) 5,601
Life and financial solutions . . . 504 10,759 (2,533) 18,867
Corporate and US administrative. . (43,006) (8,210) (55,881) (16,233)
--------- --------- --------- ---------
Total US operating (loss) income (39,983) 23,434 (51,990) 45,413
--------- --------- --------- ---------
International. . . . . . . . . . . 2,516 5,519 470 7,799
International administrative . . . (1,751) (1,863) (3,695) (3,642)
--------- --------- --------- ---------
Total international. . . . . . . 765 3,656 (3,225) 4,157
--------- --------- --------- ---------
Operating (loss) income. . . . . (39,218) 27,090 (55,215) 49,570
Equity in earnings of
unconsolidated affiliates. . . . 270 148 711 288
Minority interest. . . . . . . . . 21 (40) 39 (78)
Other income and expenses. . . . . (3,097) (2,564) (7,402) (3,805)
Income tax (benefit) expense . . . 863 9,122 (6,838) 17,012
--------- --------- --------- ---------
Net (loss) income. . . . . . . . $(42,887) $ 15,512 $(55,029) $ 28,963
========= ========= ========= =========
</TABLE>
NOTE 5. SPECIAL CHARGES AND ACCOUNTING CHANGES
The Company considers Special Charges to be unusual events or transactions
related to continuing business activities. Accounting Changes include changes
in accounting principles and estimates that require a cumulative catch-up
adjustment in accordance with Accounting Principles Board Opinion No. 20,
"Accounting Changes".
Second Quarter 2000:
The Company's results for the 2000 second quarter include pre-tax special
charges of approximately $36.8 million. Of this amount, $8.3 million is
non-cash and the remainder of these charges have or will be paid in cash.
13
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The majority of the second quarter Special Charges result from merger
termination charges of $24.3 million in fees and expenses resulting from the
Company's termination of the merger agreement with a subsidiary of Welsh,
Carson, Anderson & Stowe VIII, L.P. ("WCAS") (see Note 6, "Proposed Merger").
During the 2000 second quarter, management committed to a plan to
restructure the operations of the United Kingdom ("UK") division of its
international segment. The plan, among other things, entailed reductions in
staff and space which resulted in a restructuring charge of approximately $1.2
million. Further, management indefinitely suspended development and decreased
marketing efforts related to a software product in the UK. As a result, second
quarter Special Charges include $7.3 million of accelerated amortization to
write-off this product.
During the second quarter the Company transferred operational
responsibility for the Banking division's mortgage origination software business
to a third party. Additionally, the Company is negotiating the sale of this
business and the remainder of the Banking division's operations. The 2000
second quarter Special Charges include the Banking division operating loss of
$3.6 million on revenues of $2.8 million. Also, as a result of the decision to
sell the Banking division's operations, Special Charges include $1.1 million of
accelerated amortization to write-off a related software product.
The Company recognizes certain revenue under the percentage of completion
method of accounting ("POC") in accordance with Statement of Position 81-1.
During the 2000 second quarter, management changed the estimated profit margin
on a significant contract accounted for under POC. Based on a detailed review
of contract performance in the second quarter, the Company recognized a
cumulative adjustment of $1.5 million of additional professional services & ITO
("Information Technology Outsourcing") revenue in the 2000 second quarter which
partially offset special charges.
During the second quarter the Company sold minority interests in two companies
for $9.4 million in cash. Special Charges in the quarter are partially offset
by the related gain of $3.2 million on the sale of these investments included in
Other income and expense.
Selling, general and administrative expenses for the 2000 second quarter
include approximately $0.7 million of brand expenses associated with changing
the name of the Company (see Note 7, "Change of Company's Name").
Restructuring and other charges includes $2.1 million in legal fees incurred
during the second quarter related to the shareholder and CSC litigation (see
Note 3, "Contingencies").
Interest expense includes $1.1 million of amortization of credit facilities
fees paid in the 2000 first quarter to amend the Company's existing credit
facilities.
14
<PAGE>
First Quarter 2000:
The Company's results for the 2000 first quarter include pre-tax special
charges of approximately $12.7 million which are net of a $2.1 million gain on
the sale of the Company's 20 percent interest in an unconsolidated subsidiary
and a $1.2 million recovery of a Banking division receivable which was initially
reserved as a special charge in the 1999 fourth quarter. The majority of these
charges have or will be paid in cash.
Restructuring and other charges of approximately $12.8 million includes
approximately $7.6 million of severance related to the reduction in force of
approximately 6% or 350 employees, announced in the 2000 first quarter.
Additionally, $5.2 million is included for customer dispute and litigation costs
(see Note 3, "Contingencies").
During the 2000 second quarter the Company transferred operational
responsibility for the Banking division's mortgage origination software business
to a third party. Additionally, the Company is negotiating the sale of this
business and the remainder of the Banking division's operations. The 2000 first
quarter Special Charges include the Banking division operating loss of $4.8
million on revenues of $2.8 million including the recovery of previously
reserved accounts receivable of $1.2 million.
The Company continues to recognize amortization expense related to software
products written down in the 1999 third and fourth quarters. These products are
being amortized on the revenue basis which is faster than the straight-line
method. Revenue based amortization related to products written down in the 1999
third and fourth quarters resulted in approximately $1.0 million more
amortization expense in the 2000 first quarter than would have been recognized
under the straight-line method.
Selling, general and administrative expenses for the 2000 first quarter
includes approximately $1.4 million of brand expenses associated with changing
the name of the Company (see Note 7, "Change of Company's Name").
Investment income in the 2000 first quarter included a $2.1 million gain on
the sale of the Company's 20% interest in an unconsolidated subsidiary, and
interest expense included $1.0 million of amortization of credit facilities fees
paid in the 2000 first quarter to amend the Company's existing credit
facilities.
NOTE 6. PROPOSED MERGER
On June 20, 2000, the Company announced that it and Computer Sciences
Corporation ("CSC") entered into an Agreement and Plan of Merger which, among
other things, provided for a CSC tender offer to acquire the Company's
outstanding shares at a purchase price of $16 per share in cash. On June 28,
2000, the Company filed its Solicitation/Recommendation Statement on Schedule
14D-9 related to CSC's tender offer. As a result of receiving a second request
for information from the Federal Trade Commission concerning the proposed
merger, CSC extended the tender offer until September 12, 2000.
15
<PAGE>
As a result of entering the Agreement and Plan of Merger with CSC, the Company
was required to pay a $19.0 million fee and to pay up to $5.0 million in
expenses for terminating its previously proposed merger with WCAS. The cash
required to pay this fee was loaned to the Company by CSC.
NOTE 7. CHANGE OF COMPANY'S NAME
Following an earlier announcement of plans to change the Company's name,
the Company began doing business as Mynd Corporation ("Mynd") on May 1, 2000.
Officially changing the Company's name requires a two-thirds vote of the
shareholders at a shareholder's meeting for holders of record on September 5,
2000, to be held on September 27, 2000, at the Company's headquarters. If
approved by the shareholders, the Company will formally change its legal name
with relevant authorities including the New York Stock Exchange.
16
<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/A for the year ended December 31, 1999.
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>
2000 vs. 1999
Percent
Percentage of Revenues Increase (Decrease)
-------------------------- --------------------
Three Six Three Six
Months Ended Months Ended Months Months
June 30, June 30, Ended Ended
----------- -----------
2000 1999 2000 1999 June 30
----- ----- ----- ----- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Licensing . . . . . . . . . . . . . 18.7% 25.2% 18.2% 23.5% (40)% (33)%
Services. . . . . . . . . . . . . . 81.3 74.8 81.8 76.5 (12) (8)
------------- ------------- ------ ------
100.0 100.0 100.0 100.0 (19) (14)
------------- ------------- ------ ------
Operating expenses
Cost of revenues
Employee compensation and benefits 53.7 44.0 53.6 45.0 (2) 3
Computer & communication expenses. 9.9 6.8 9.5 7.0 18 16
Depreciation & amortization
of property, equipment &
capitalized software costs. . . . 16.1 9.9 12.9 10.0 32 12
Other costs & expenses . . . . . . 6.9 5.4 7.6 5.0 3 31
Selling, general &
administrative expenses . . . . . 19.0 16.3 19.0 16.1 (6) 2
Amortization of goodwill and
other intangibles . . . . . . . . 2.7 2.0 2.5 2.0 9 10
Restructuring & other charges . . . 2.3 - 5.6 -
Merger termination charges. . . . . 17.4 - 8.4 -
------------- ------------- ------ ------
128.0 84.4 119.1 85.1 22 21
------------- ------------- ------ ------
Operating (loss) income. . . . . . . (28.0) 15.6 (19.1) 14.9 (245) (211)
Equity in earnings of unconsolidated
affiliates. . . . . . . . . . . . 0.2 0.1 0.2 0.1 82 147
Investment income. . . . . . . . . . 2.7 0.1 2.1 0.1 1,921 1,297
Interest expense and other charges . (4.9) (1.6) (4.7) (1.3) 147 218
------------- ------------- ------ ------
Income (loss) before income taxes. . (30.0) 14.2 (21.5) 13.8 (271) (235)
Income tax (benefit) expense . . . . 0.6 5.2 (2.4) 5.1 (91) (140)
------------- ------------- ------ ------
Net (loss) income. . . . . . . . . . (30.6)% 9.0% (19.1)% 8.7% (376)% (290)%
============= =============
</TABLE>
17
<PAGE>
THREE MONTH COMPARISON
REVENUES
Licensing
---------
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.
<TABLE>
<CAPTION>
Three Months
Ended June 30,
----------------
2000 1999 Change
----- ----- ------
(Dollars in millions)
<S> <C> <C> <C>
Initial charges. . . . . . . $ 9.5 $26.8 (65)%
Monthly charges. . . . . . . 16.7 16.9 (1)
------ ------
$26.2 $43.7 (40)%
====== ======
Percentage of total revenues 18.7% 25.2%
------ ------
</TABLE>
Initial licensing
Initial license revenues decreased $17.3 million for the 2000 second
quarter compared with the 1999 second quarter, with the following decreases by
business segment: property and casualty down 92% ($8.3 million); claims down
56% ($2.4 million); life and financial solutions down 35% ($2.0 million) with
one new CyberLife license in the quarter; and international down 58% ($4.6
million) with a S3+ license expansion to include the acquirer of an existing
customer in Europe.
Initial license charges for the second quarter of 2000 included right-to-use
licenses to existing customers of $0.5 million. This compares to $5.3 million in
right-to-use licenses for the second quarter of 1999. 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.
Second quarter 1999 initial license charges include $2.0 million of
licenses to the former owners of FAS which the Company acquired at the end of
the second quarter.
18
<PAGE>
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. These agreements were effected by the Company's adoption of Staff
Accounting Bulletin 101 as of December 31, 1999. Consequently, the $3.5 million
of initial license revenue was adjusted in the 1999 fourth quarter and is being
recognized ratably over the terms of the respective agreements. Initial license
revenue includes $0.7 million of this revenue in the 2000 second quarter.
The increasing rate of change in the insurance and banking industries
coupled with the rapid evolution of eCommerce technology and the volatility of
initial license revenues, as illustrated by the above table, is leading the
Company to consider new business models that place less emphasis on initial
license revenue and place more emphasis on transaction based revenue. The
Company expects this transition to occur gradually over the next several years
and will likely affect the amount and timing of revenue recognized in the
Company's financial statements.
The Company believes that during the 2000 second quarter, uncertainty concerning
the Company's future ownership, including the proposed merger with CSC,
adversely affected customers' decisions to license software from the Company.
Management anticipates that the adverse effect will continue until the
uncertainty is resolved.
Set forth below is a comparison of initial license revenue by segment for
the periods ending June 30, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
Three Months
Ended June 30,
----------------
2000 1999 Change
----- ----- ------
(Dollars in millions)
<S> <C> <C> <C>
Property and casualty . . . . . . . . $0.7 $ 9.0 (92)%
Claims. . . . . . . . . . . . . . . . 1.8 4.2 (57)
Life and financial solutions. . . . . 3.7 5.7 (35)
International . . . . . . . . . . . . 3.3 7.9 (58)
----- ------
$9.5 $26.8 (65)%
===== ======
Percentage of total revenues 6.8% 15.4%
----- ------
</TABLE>
Monthly licensing
Monthly license revenues in the 2000 second quarter were essentially consistent
with the 1999 second quarter in total with the following increases or decreases
by business segment: property and casualty down 21% ($1.5 million) due to weak
1999 and 2000 first quarter licensing and the effect of previous right-to-use
licenses; claims up 650% ($1.3 million); life and financial solutions and
international were relatively unchanged at $4.9 million and $4.5 million for
both quarters, respectively.
19
<PAGE>
Set forth below is a comparison of monthly license revenue by segment for the
periods ending June 30, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
Three Months
Ended June 30,
----------------
2000 1999 Change
----- ----- ------
(Dollars in millions)
<S> <C> <C> <C>
Property and casualty. . . . $ 5.8 $ 7.3 (21)%
Claims . . . . . . . . . . . 1.5 0.2 650
Life and financial solutions 4.9 4.9 -
International. . . . . . . . 4.5 4.5 -
----- ------
$16.7 $16.9 (1)%
===== ====== =====
Percentage of total revenues 11.9% 9.8%
----- -----
</TABLE>
Services
---------
The Company's services revenue consists primarily of Professional Services &
Information Technology Outsourcing ("ITO") and Business Process Outsourcing
("BPO"). Services revenue is derived from professional support services, which
include implementation and integration assistance, consulting and education
services and outsourcing services.
<TABLE>
<CAPTION>
Three Months
Ended June 30,
----------------
2000 1999 Change
----- ----- ------
(Dollars in millions)
<S> <C> <C> <C>
Professional services & ITO. $ 86.9 $111.1 (22)%
BPO. . . . . . . . . . . . . 25.0 16.9 48
Other. . . . . . . . . . . . 2.0 1.8 11
------- -------
$113.9 $129.8 (12)%
======= =======
Percentage of total revenues 81.3% 74.8%
------- -------
</TABLE>
Professional Services & ITO
Professional services & ITO revenues decreased $24.2 million for the 2000 second
quarter compared with the 1999 second quarter, with the following decreases and
increase by business segment: property and casualty down 27% ($10.9 million);
claims up 13% ($0.3 million); life and financial solutions down 12% ($3.8
million); and international down 27% ($9.8 million). The increase in claims is
primarily due to the Company's 1999 acquisitions. All other segments were
negatively impacted by weak initial licensing activity in 1999 and the first
half of 2000. In addition, property and casualty was affected by the migration
of ITO customers from mainframe Series II processing to AS400 Point processing.
Also, international was adversely affected by the loss of a significant ITO
customer in the 1999 third quarter. The 2000 second quarter international
segment's revenue includes a cumulative catch-up adjustment of approximately
$1.5 million of revenue recognized in the 2000 second quarter based on a change
in accounting estimate associated with a significant contract accounted for on
the basis of POC.
20
<PAGE>
Set forth below is a comparison of professional services & ITO revenue by
segment for the periods ending June 30, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
Three Months
Ended June 30,
----------------
2000 1999 Change
----- ----- ------
(Dollars in millions)
<S> <C> <C> <C>
Property and casualty. . . . $ 29.9 $ 40.8 (27)%
Claims . . . . . . . . . . . 2.7 2.4 13
Life and financial solutions 28.1 31.9 (12)
International. . . . . . . . 26.2 36.0 (27)
------- -------
$ 86.9 $111.1 (22)%
====== ====== ======
Percentage of total revenues 62.1% 64.1%
------ -------
</TABLE>
BPO
BPO revenues increased $8.1 million for the 2000 second quarter compared with
the 1999 second quarter, with the following increases by business segment:
property and casualty up 5% ($0.6 million); life and financial solutions up 100%
($5.1 million) due to internal growth and the acquisition of FAS ($2.8 million)
in 1999; and international up 1,200% ($2.4 million) due to increased processing
in Europe and South Africa. The claims segment has no BPO operations.
Set forth below is a comparison of BPO revenue by segment for the periods ending
June 30, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
Three Months
Ended June 30,
----------------
2000 1999 Change
----- ----- ------
(Dollars in millions)
<S> <C> <C> <C>
Property and casualty. . . . $ 12.2 $11.6 5%
Claims . . . . . . . . . . . - - -
Life and financial solutions 10.2 5.1 100
International. . . . . . . . 2.6 0.2 1,200
------ ----- ------
$ 25.0 $16.9 48%
====== ===== ======
Percentage of total revenues 17.8% 9.7%
------- ------
</TABLE>
21
<PAGE>
OPERATING EXPENSES
COST OF REVENUES
Employee compensation and benefits decreased 2% for the 2000 second quarter
compared with the 1999 second quarter. Before the effect of the acquisitions in
1999 (see Note 2 of Notes to Consolidated Financial Statements), employee
compensation and benefits for the second quarter of 2000 decreased 7% when
compared with second quarter 1999. Domestic employee compensation in the 2000
second quarter is essentially consistent with the 1999 second quarter. Domestic
benefits expense increased $1.3 million due to the acceleration of health claims
paid as a result of previous reductions in force. International compensation and
benefits decreased 15% ($3.3 million) largely due to previous reductions in
force.
Computer and communications expenses increased 18% for the 2000 second quarter
compared with the 1999 second quarter due to the Company's 1999 acquisitions and
increases in processing volumes and data center operating software license fees.
Depreciation and amortization of property, equipment and capitalized
software costs increased 32% for the 2000 second quarter compared with the 1999
second quarter. Depreciation and amortization expense was reduced as a result
of software write-downs recorded in the 1999 third and fourth quarters and a
reduction in the Company's capital expenditures for property, plant and
equipment. However, these savings were more than offset by the 2000 second
quarter software write-offs discussed below and the acquisitions of Dorn and FAS
in 1999 (see Note 5 of Notes to Consolidated Financial Statements).
As part of the UK restructuring plan (see Note 5 of Notes to Consolidated
Financial Statements), management indefinitely suspended development and
decreased marketing efforts related to a software product in the UK. As a
result, approximately $7.3 million of previously capitalized software
development costs has been expensed as accelerated amortization. An additional
$1.1 million of accelerated amortization was similarly recognized in connection
with the decision to sell the Banking division operations.
The Company continues to recognize amortization expense related to software
products written down in the 1999 third and fourth quarters. As a reflection of
their estimated impaired status, these products are being amortized on the
revenue basis which is faster than straight-line method. Revenue based
amortization related to products written down in the 1999 third and fourth
quarters resulted in approximately $0.3 million more amortization expense in the
2000 second quarter than would have been recognized under the straight-line
method.
Other operating costs and expenses increased 3% for the second quarter of
2000 compared with the 1999 second quarter due to the Company's acquisitions in
1999 and a decrease in the amounts capitalized related to internal software
development and internal use systems.
22
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased from 16% of revenues
in the 1999 second quarter compared to 19% in the 2000 second quarter. However,
the dollar amount decreased 6% for the 2000 second quarter compared with the
1999 second quarter in part due to the reduction in force and decreased costs
associated with the Company's lower revenues offset by the effects of the
Company's 1999 acquisitions and approximately $0.7 million of brand expenses
associated with changing Company's name. Before the effects of acquisitions and
brand expenses, selling, general and administrative expenses decreased 14%.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles increased 9% for the 2000
second quarter compared with the 1999 second quarter, due largely to the
Company's 1999 acquisitions.
RESTRUCTURING AND OTHER CHARGES
Restructuring and other charges include approximately $1.2 million of cash
charges paid or to be paid as a result of initiatives taken by the Company in
the 2000 second quarter for an international reduction in force of 37 employees
in the UK. Additionally, restructuring and other charges includes legal
expenses ($2.1 million) associated with the CSC and shareholder lawsuits (see
Note 3 of Notes to Consolidated Financial Statements).
MERGER TERMINATION CHARGES
Merger termination charges include a $19.0 termination fee and $5.3 million
of accrued expenses resulting from the Company's termination of the WCAS merger
(see Note 6 of Notes to Consolidated Financial Statements).
OPERATING INCOME (LOSS)
The 2000 second quarter operating loss of $39.2 million includes net
Special Charges of approximately $38.8 million (see Note 5 of Notes to
Consolidated Financial Statements). The 1999 second quarter operating income
was $27.1 million including the Banking division which is treated as Special
Charges in the 2000 second quarter. Exclusive of the Banking division, 1999
first quarter operating income was $25.9 million by comparison to the 2000
second quarter operating loss before special charges of $0.4 million.
23
<PAGE>
Set forth below is a comparison of operating income (loss) by segment for the
periods ending June 30, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
Three Months
OPERATING INCOME (LOSS) Ended June 30,
----------------
2000 1999 Changes
----- ----- -------
(Dollars in millions)
<S> <C> <C> <C>
Property and casualty. . . . $ 4.2 $17.5 (76)%
Claims . . . . . . . . . . . (1.7) 3.3 (152)
Life and financial solutions 0.5 10.8 (95)
Corporate. . . . . . . . . . (43.0) (8.2) (424)
International. . . . . . . . 0.8 3.7 (78)
------ ------- ------
$(39.2) $27.1 (245)%
====== ======= ======
</TABLE>
Property and casualty operating income decreased $13.3 million or 76% due
primarily to an $8.3 million decrease in initial license charges and a $10.9
million decline in professional services & ITO revenue. Additionally,
professional services & ITO margins declined from 33% to 21%.
Claims segment operating income decreased $5.0 million to a loss of $1.7
million due primarily to $2.4 million lower initial license charges in the 2000
second quarter and higher operating costs due to 1999 acquisitions.
Life and financial solutions segment operating income declined $10.3
million or 95% due primarily to the operating loss of the Banking division ($3.6
million), lower initial license charges ($2.0 million) and a decline in
professional services & ITO revenue and margins.
Not withstanding the Company's reduction in force, the reduction in expense
lagged behind the decline in revenues resulting in lower margins in its property
and casualty and life segments.
International segment operating income declined $2.9 million or 78%
primarily due to a $4.6 million decline in initial license charges offset by
savings from the 1999 third quarter restructuring. Before special charges the
international segment's operating income increased $4.3 million of 118% compared
to the 1999 second quarter reflecting the benefits of previous restructuring.
A significant portion of both the Company's revenues and its operating income is
derived from initial licensing agreements received as part of the Company's
software licensing activities. Because a substantial portion of initial
licensing revenues are recorded at the time new systems are licensed, there can
be significant fluctuations from quarter to quarter in 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.
24
<PAGE>
Set forth below is a comparison of initial license revenues for the last eight
quarters expressed as a percentage of total revenues of each of the periods
presented:
<TABLE>
<CAPTION>
2000 1999 1998
----- ---------------- ---------
2nd 1st 4th 3rd 2nd 1st 4th 3rd
(Dollars in Millions)
---------- -------------------------- ------------
<S> <C>
Initial license revenues $9.5 9.1 $8.7 $19.2 $26.8 $17.5 $27.4 $14.7
% of total revenues 6.8% 6.1% 6.1% 11.4% 15.4% 11.0% 16.0% 9.7%
</TABLE>
The increasing rate of change in the insurance and banking industries
coupled with the rapid evolution of eCommerce technology and the volatility of
initial license revenues, as illustrated by the above table, is leading the
Company to consider new business models that place less emphasis on initial
license revenue and place more emphasis on transaction based revenue. The
Company expects this transition to occur gradually over the next several years
and will likely affect the amount and timing of revenue recognized in the
Company's financial statements.
The Company believes that during the second quarter, uncertainty concerning
the Company's future ownership, including the proposed merger with CSC,
adversely affected customers' decisions to license software from the Company.
Management anticipates that this adverse effect will continue until the
uncertainty is resolved.
OTHER INCOME AND EXPENSE
Investment income includes a $3.2 million gain on the sale of investments.
Interest expense and other charges is comprised primarily of interest
expense which increased $4.0 million for the 2000 second quarter compared with
the 1999 second quarter, principally due to higher levels of borrowed funds
under the Company's credit agreements along with higher interest rates and $1.2
million of amortization expense for credit facilities fees paid in the 2000
first quarter to amend the Company's credit agreements. The nominal interest
rate applicable to borrowings under the Company's credit facilities during the
second quarter of 2000 ranged from 7.375% to 9.5% compared to a range of 5.1625%
to 5.25% in the 1999 second quarter.
INCOME TAXES
The effective income tax rate (income taxes expressed as a percentage of pre-tax
income) was -2.1% and 37.0% for the second quarters of 2000 and 1999,
respectively. The effective rate for the three months ended June 30, 2000 is
not comparable to the three months ended June 30, 1999 due primarily to non-tax
effected merger related costs incurred during the period and the establishment
of a valuation allowance for certain deferred tax assets. The valuation
allowance was established due to the uncertain realization of those assets in
light of the Company's operating performance in the 2000 second quarter.
25
<PAGE>
SIX MONTH COMPARISON
REVENUES
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------
Licensing 2000 1999 Change
----- ----- ------
(Dollars in millions)
<S> <C> <C> <C>
Initial charges. . . . . . . $18.6 $44.3 (58)%
Monthly charges. . . . . . . 33.9 34.2 (1)
------ ------
$52.5 $78.5 (33)%
====== ======
Percentage of total revenues 18.2% 23.5%
------ ------
Initial licensing
------------------------------
</TABLE>
Initial license revenues decreased $25.7 million for the first six months
of 2000 compared with the first six months of 1999, with the following decreases
by business segment: property and casualty down 90% ($15.4 million) due
primarily to right-to-use agreements included in the first six months of 1999;
claims down 37% ($2.6 million) due primarily to remarketing agreements included
in the first six months of 1999; life and financial solutions down 42% ($3.7
million) with no Banking division licenses in 2000 compared with strong Banking
division licenses in the first half of 1999; and international down 36% ($4.0
million).
Initial license charges for the first six months of 2000 include right-to-use
licenses to existing customers of $0.5 million compared with $11.2 million for
the first six months of 1999. 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.
Initial license charges for the first six months of 1999 include the first
license of the Company's new workplace injury claims management tool, COA, which
was licensed in conjunction with the purchase of Legalgard and $2.0 million of
licenses to the former owners of FAS which the Company acquired at the end of
the second quarter.
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. These agreements were
affected by the Company's adoption of Staff Accounting Bulletin 101 as of
December 31, 1999. Consequently, the $3.5 million of initial license revenue was
adjusted in the 1999 fourth quarter and is being recognized ratably over the
terms of the respective agreements. Initial license revenue includes $1.7
million of this revenue in the first six months of 2000.
26
<PAGE>
The increasing rate of change in the insurance and banking industries
coupled with the rapid evolution of eCommerce technology and the volatility of
initial license revenues, as illustrated by the above table, is leading the
Company to consider new business models that place less emphasis on initial
license revenue and place more emphasis on transaction based revenue. The
Company expects this transition to occur gradually over the next several years
and will likely affect the amount and timing of revenue recognized in the
Company's financial statements.
The company believes that lingering customer Y2K concerns, uncertainty
surrounding the Company's credit agreements and the delayed filing of the
Company's 1999 annual report had a negative effect on initial licensing activity
in the 2000 first quarter. Furthermore, the Company believes that the WCAS
merger agreement, and its subsequent termination upon entering into the merger
agreement with CSC made it difficult for the Company to conclude initial
licenses with customers in the second quarter due to uncertainties concerning
the Company's ownership.
Set forth below is a comparison of initial license revenue by segment for
the periods ending June 30, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------
2000 1999 Change
----- ----- ------
(Dollars in millions)
<S> <C> <C> <C>
Property and casualty. . . . $1.8 $17.2 (90)%
Claims . . . . . . . . . . . 4.5 7.1 (37)
Life and financial solutions 5.2 8.9 (42)
International. .. . 7.1 11.1 (36)
----- ----- ------
$18.6 $44.3 (58)%
===== ======
Percentage of total revenues 6.5% 13.3%
----- ------
</TABLE>
Monthly licensing
-
Monthly license charges decreased $0.3 million for the first six months of
2000 compared with the first six months of 1999 with the following increases or
decreases by business segment: property and casualty down 17% ($2.6 million)
due to weak 1999 and 2000 first half licensing and the effect of right-to-use
licenses; claims up $2.8 million primarily due to the effect of 1999 second
quarter acquisitions (see Note 2 of Notes to Consolidated Financial Statements);
life and financial solutions was relatively unchanged; and international down 5%
($0.5 million).
27
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------
2000 1999 Change
----- ----- ------
(Dollars in millions)
<S> <C> <C> <C>
Property and casualty. . . . $12.3 $ 14.9 (17)%
Claims . . . . . . . . . . . 2.9 0.1 2,800
Life and financial solutions 9.9 9.9 -
International. . . . . . . . 8.8 9.3 (5)
----- ------- ------
$33.9 $ 34.2 (1)%
===== ======= ======
Percentage of total revenues 11.8% 10.3%
----- ------
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------
Services 2000 1999 Change
----- ----- ------
(Dollars in millions)
<S> <C> <C> <C>
Professional services & ITO. $184.8 $221.0 (16)%
BPO. . . . . . . . . . . . . 48.1 32.2 49
Other. . . . . . . . . . . . 3.0 2.1 43
------- -------
$235.9 $255.3 (8)%
======= =======
Percentage of total revenues 81.8% 76.5%
------- -------
</TABLE>
Professional services & ITO
Professional services & ITO revenues decreased $36.2 million for the first
six months of 2000 compared with the first six months of 1999, with the
following decreases or increases by business segment: property and casualty
down 24% ($20.3 million); claims up 146% ($3.5 million); life and financial
solutions down 3% ($1.8 million); and international down 24% ($17.6 million).
The decreases are principally due to weak initial licensing activity during 1999
and the first half of 2000. In addition, property and casualty was adversely
affected by the migration of ITO customers from mainframe Series II processing
to AS400 Point processing. Also, international was adversely affected by the
loss of a significant ITO customer in the 1999 third quarter.
In the first six months of 2000, the international segment's revenue
includes a $1.5 million cumulative catch-up adjustment based on a change in
accounting estimate associated with a significant contract accounted for on the
basis of POC. The property and casualty segment's 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.
28
<PAGE>
Set forth below is a comparison professional services & ITO revenue by
segment for the periods ending June 30, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
Six months
Ended June 30,
----------------
2000 1999 Change
----- ----- ------
(Dollars in millions)
<S> <C> <C> <C>
Property and casualty. . . . $ 64.1 $ 84.4 (24)%
Claims . . . . . . . . . . . 5.9 2.4 146
Life and financial solutions 59.7 61.5 (3)
International. . . . . . . . 55.1 72.7 (24)
------ -------
$184.8 $221.0 16%
====== ========
Percentage of total revenues 64.1% 66.2%
------ -------
</TABLE>
BPO
BPO revenues increased $15.9 million for the first six months of 2000 compared
with the first six months of 1999, with the following increases by business
segment: property and casualty up 5% ($1.2 million); life insurance and
financial solutions up 125% ($11.1 million) due to internal growth and the
acquisition of FAS ($2.8 million) in 1999; and international up $3.6 million due
to increased processing in Europe and South Africa. The claims segment has no
BPO operations.
Set forth below is a comparison BPO revenue by segment for the periods ending
June 30, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
Six months
Ended June 30,
----------------
2000 1999 Change
----- ----- ------
(Dollars in millions)
<S> <C> <C> <C>
Property and casualty. . . . $ 24.0 $22.8 5%
Claims . . . . . . . . . . . - - -
Life and financial solutions 20.0 8.9 125
International. . . . . . . . 4.1 0.5 720
------ ------
$ 48.1 $32.2 49%
====== ======
Percentage of total revenues 16.7% 9.6%
------ -------
</TABLE>
OPERATING EXPENSES
COST OF REVENUES
Employee compensation and benefits increased 3% for the first six months of
2000 compared with the first six months of 1999, due primarily to the
acquisitions in 1999 (see Note 2 of Notes to Consolidated Financial Statements)
partially offset by the reductions in force. Before the effect of
these acquisitions employee compensation and benefits for the first six months
of 2000 decreased 3% when compared with the first six months of 1999. Domestic
employee compensation in the first six months of 2000 increased 9% ($9.2
million) compared with the first six months of 1999 with the effects of
reductions in force in prior quarters being offset by acquisitions in 1999 and
an increase in benefit expense due to the acceleration of health claims paid
29
<PAGE>
as a result of the reduction in force. International compensation and benefits
decreased 10% ($4.7 million) reflecting the benefit of 1999 third quarter and
2000 first quarter reductions in force.
Computer and communications expenses increased 16% for the first six months of
2000 compared with the first six months of 1999. The increase is due to the
Company's 1999 acquisitions, an increase in processing volumes and data center
operating software license fees.
Depreciation and amortization of property, equipment and capitalized software
costs increased 12% for the first six months of 2000 compared with the first six
months of 1999. Depreciation and amortization was reduced as a result of
software write-downs recorded in the 1999 third and fourth quarters and a
reduction in the Company's capital expenditures for property and equipment.
However, these savings were more than offset by the 2000 second quarter software
write-offs (see Note 5 of Notes to Consolidated Financial Statements) discussed
below and the acquisitions of Dorn and FAS in 1999.
Other operating costs and expenses increased 31% for the first six months of
2000 compared with the first six months of 1999. This increase was due to the
Company's acquisitions in 1999 being partially off-set by a decrease in the
amount of development expense capitalized related to internal software
development and internally used systems.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 2% for the first six
months of 2000 compared with the first six months of 1999. Before the effects
of the Company's 1999 acquisitions and approximately $2.1 million of brand
expenses associated with changing the Company's name (see Note 7 of Notes to the
Consolidated Financial Statements regarding Change of Company's Name) selling,
general and administrative expenses decreased 8% due partly to the reduction in
force and decreased costs associated with the Company's lower revenues in the
first six months of 2000. Selling, general and administrative expenses
increased to 17% of revenues in the first six months of 2000 compared to 16% for
the first six months of 1999.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles increased 10% for the first
six months of 2000 compared with the first six months of 1999, principally due
to increased amortization related to the Company's 1999 acquisitions.
RESTRUCTURING AND OTHER CHARGES
Restructuring and other charges include approximately $8.7 million of cash
charges paid or to be paid as a result of initiatives taken by the Company in
the first six months of 2000 for a worldwide reduction in force of 350 employees
in the first quarter and a reduction in force in the international segment of 37
employees in the second quarter. An additional $7.3 million relates to a
settlement of a dispute with a customer and legal expenses associated with the
CSC and shareholder lawsuits (see Note 3 of Notes to Consolidated Financial
Statements).
30
<PAGE>
MERGER TERMINATION CHARGES
Merger termination charges include a $19.0 termination fee and $5.3 million
of accrued WCAS and Company expenses resulting from the Company's termination of
the WCAS merger (see Note 6 of Notes to Consolidated Financial Statements).
OPERATING (LOSS) INCOME
The 2000 six month results produced an operating loss of $55.2 million
compared with the 1999 six month operating income of $49.6 million. The 2000
six month operating loss includes Special Charges of $57.4 million (see Note 5
of the Notes to the Consolidated Financial Statements). Before these special
charges, the 2000 six month resulted in operating income of $2.2 million
compared with operating income of $48.9 million in the 1999 six months. The
remaining $46.7 million decrease relates primarily to a $25.7 million decline in
initial license revenue and declining services revenue and margins.
Set forth below is a comparison of operating income (loss) by segment for
the periods ending June 30, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
Six Months
OPERATING INCOME (LOSS) Ended June 30,
----------------
2000 1999 Change
----- ----- ------
(Dollars in millions)
<S> <C> <C> <C>
Property and casualty. . . . $ 9.4 $37.2 (75)%
Claims . . . . . . . . . . . (3.0) 5.6 (154)
Life and financial solutions (2.5) 18.8 (113)
Corporate. . . . . . . . . . (55.9) (16.2) (245)
International. . . . . . . . (3.2) 4.2 (176)
----------------
$(55.2) $49.6 (211)%
======= ======= ======
</TABLE>
Property and casualty segment operating income decreased $27.8 million or
75% primarily due to a $15.4 million decrease in initial license charges
accompanied by a $20.3 million or 24% decrease in professional services & ITO
revenue.
Claims segment operating income decreased $8.6 million to a loss of $3.0
million principally due to a $2.6 million decrease in initial license charges
and higher operating costs due to 1999 acquisitions.
Life segment operating income decreased $21.3 million to a loss of $2.5
million principally due to Banking division losses of $8.4 million and lower
initial license charges of $3.7 million.
International segment operating income decreased $7.4 million to a loss of
$3.2 million primarily due to special charges of $9.4 million described above, a
$4.0 million decrease in initial license charges and lower professional services
& ITO revenue.
31
<PAGE>
Not withstanding the Company's reduction in force, the reduction in expense
lagged behind the decline in revenues resulting in lower margins in its property
and casualty, life and international segments.
A significant portion of both the Company's revenues and its operating
income is derived from initial licensing agreements received as part of the
Company's software licensing activities. Because a substantial portion of
initial licensing revenues are recorded at the time new systems are licensed,
there can be significant fluctuations from quarter to quarter in 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 increasing rate of change in the insurance and banking industries
coupled with the rapid evolution of eCommerce technology and the volatility of
initial license revenues, as illustrated by the above table, is leading the
Company to consider new business models that place less emphasis on initial
license revenue and place more emphasis on transaction based revenue. The
Company expects this transition to occur gradually over the next several years
and will likely affect the amount and timing of revenue recognized in the
Company's financial statements.
The Company believes that during the second quarter, uncertainty concerning
the Company's future ownership, including the proposed merger with CSC,
adversely affected customers' decisions to license software from the Company.
Management anticipates that this adverse effect will continue until the
uncertainty is resolved.
OTHER INCOME AND EXPENSE
Investment income includes $5.3 million of gain on sale of investments.
Interest expense and other charges is comprised primarily of interest
expense which increased $9.2 million for the first six months of 2000 compared
with the first six months of 1999, principally due to higher interest rates on
higher levels of borrowed funds under the Company's credit agreements. The
remainder of the increase is due to $2.1 million of amortization expense for
credit facilities fees paid in the 2000 first quarter to amend the Company's
credit agreements. The nominal interest rate applicable to borrowings under the
Company's credit facility during the first six months of 2000 ranged from 7.375%
to 9.6% compared to a range of 5.1625% to 5.85% for the same period in 1999.
INCOME TAXES
The effective income tax rate (income taxes expressed as a percentage of
pre-tax income) was 11.1% and 37.0% for the first six months of 2000 and 1999,
respectively. The effective rate for the six months ended June 30, 2000 is not
comparable to the six months ended June 30, 1999 due primarily to non-tax
effected merger related costs incurred during the first half of 2000 and the
establishment of a valuation allowance for certain deferred tax assets. The
valuation allowance was established due to the uncertain realization of those
assets in light of the Company's operating performance.
32
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-----------------------------------------------------------
(Dollars in millions)
<S> <C> <C>
Cash and equivalents and marketable
securities. . . . . . . . . . . . $ 20.6 $ 17.8
Current assets. . . . . . . . . . . 201.2 212.0
Current liabilities . . . . . . . . 337.4 76.0
Working capital . . . . . . . . . . (136.2) 136.0
Long-term debt. . . . . . . . . . . 0.0 227.0
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
--------------------------------------------------------
(Dollars in millions)
<S> <C> <C>
Cash (used) provided by operations. . $ (1.3) $ 33.5
Cash used by investing activities . . (20.9) (120.9)
Cash provided by financing activities 25.0 94.3
</TABLE>
The Company's total debt, net of cash and marketable securities, at June 30,
2000 was $238.4 million, an increase from the comparable amount ($205.0 million)
at March 31, 2000 which resulted primarily from the termination fees related to
the WCAS transaction. Historically, the Company has used cash from operations
for the development and acquisition of new products, capital expenditures,
acquisition of businesses and repurchases of the Company's stock. For the
second quarter of 2000, compared with the second quarter of 1999 however, the
Company significantly decreased expenditures in all these areas and expects
these expenditures during 2000 to continue at amounts lower than 1999.
As of June 30, 2000, the Company had a $180.0 million line of credit of which
$168.0 million was outstanding. Availability under this credit line will be
reduced to $125 million on April 1, 2001 and will expire on July 1, 2001. The
Company's $70.0 million term loan, all of which was outstanding at June 30,
2000, matures on January 31, 2001. In addition, CSC advanced to the Company the
cash necessary to pay the $19.0 million termination fee due to WCAS upon the
termination of the WCAS merger agreement, and committed to advance up to $5.0
million for related expenses. The amount of these expenses are yet to be agreed
but are expected to be paid in the 2000 third quarter. CSC also provided the
Company a line of credit up to $30.0 million for operational working capital
needs. Any amounts due CSC mature on July 3, 2001. Since all of the Company's
debt matures on or before July 3, 2001 and in light of the issues concerning the
Company's ability to meet its financial covenants, more fully discussed below,
all of the Company's indebtedness is shown under current liabilities in the
accompanying balance sheet as of June 30, 2000.
33
<PAGE>
The results for the quarter ended June 30, 2000 resulted in a violation of
the defined Consolidated Adjusted Cash Flow covenant of both the $180.0 million
line of credit and $70.0 million term loan agreements as amended in April, 2000.
Consequently, the Company entered into an amendment in August, 2000, which
brought it into compliance with its agreements. That amendment provides for the
exclusion from the Consolidated Adjusted Cash Flow and Consolidated Minimum
Tangible Net Worth covenants of up to $24.0 million in fees and expenses due
WCAS. In addition, the amendment reduced the required minimum amount of
Consolidated Adjusted Cash Flow for the quarter ended June 30, 2000 from $15.0
million to $10.0 million, but did not amend the required minimum amount for the
quarter ended September 30, 2000 which is $30.0 million. The amendment left
unchanged the required level of Minimum Consolidated Tangible Net Worth as at
September 30, 2000, which is $196.7 million
Future credit availability under the Company's amended credit agreements is
dependent upon the Company achieving improvements in its operating performance.
In light of the uncertainties surrounding future performance and the Company's
current debt position, the Company is exploring alternative means to reduce its
debt, some of which would be subject to approval by CSC.
Significant expenditures anticipated for the remainder of 2000, excluding
new product development are as follows: acquisition of data processing and
communications equipment, support software, office furniture, fixtures and
equipment ($10.0 million) and costs relating to the continued enhancement of
existing software products ($20.0 million).
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 services 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
significant 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.
34
<PAGE>
Contracts with governmental agencies involve a variety of special risks,
including the risk of early contract termination by the governmental agency and
changes associated with newly elected state administrations or newly appointed
regulators.
The timing and amount of the Company's revenues are subject to a number of
factors, 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.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Amounts affected by these estimates include, but are not limited to, the
estimated useful lives, related amortization expense and carrying values of the
Company's intangible assets and the net realizable value of capitalized software
development costs and accrued reserves established for contingencies such as
litigation and restructuring activities. Changes in the status of certain
matters or facts or circumstances underlying these estimates could result in
material changes to these estimates, and actual results could differ from these
estimates.
A significant portion of both the Company's revenues and its operating
income is derived from initial licensing agreements received as part of the
Company's software licensing activities. Because a substantial portion of these
revenues are recorded at the time systems are licensed, there can be significant
fluctuations from quarter-to-quarter and year-to-year 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 during the second quarter, uncertainty concerning
the Company's future ownership, including the proposed merger with CSC,
adversely affected customers' decisions to license software from the Company.
Management anticipates that this adverse effect will continue until the
uncertainty is resolved.
35
<PAGE>
The Year 2000 has caused an unprecedented level of investment in systems and
remediation services that may adversely affect customers' decisions to invest in
new application software. In addition, the Company believes that system
evaluations and decision processes are being affected by uncertainties related
to the Internet and its emergence as a viable insurance distribution channel is
causing a re-evaluation of the traditional methods of distribution for insurance
products. The Company also believes that in order for insurance companies to
capitalize on this new distribution method they will be required to redesign
their business models and related support systems. The issues raised by the
emergence of the Internet and related technology requirements will be
distracting and confusing for many insurance companies and complicate the
process of transitioning the insurance industry to modern architecture.
Therefore, customer uncertainty as to their Internet and enterprise business
strategies may extend sales cycles for large enterprise systems. The above
factors limit the Company's ability to accurately predict licensing and services
demand.
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.
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.
36
<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.
The Company did not file any reports on Form 8-K during the quarter ended
June 30, 2000.
37
<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 14, 2000 Timothy V. Williams
Executive Vice President
(Chief Financial Officer)
38
<PAGE>
POLICY MANAGEMENT SYSTEMS CORPORATION
EXHIBIT INDEX
TO FORM 10-Q FOR QUARTER ENDED JUNE 30, 2000
Exhibit
-------
Number
------
2. PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION
A. Agreement and Plan of Merger between Politic Acquisition Corporation and
Policy Management Systems Corporation dated March 30, 2000 (filed as an exhibit
to Form 8-K dated March 30, 2000 and is incorporated herein by reference)
B. Amended and Restated Agreement and Plan of Merger between Politic
Acquisition Corporation and Policy Management Systems Corporation dated as of
April 27, 2000 (filed as an exhibit to Form S-4, Registration Statement, dated
April 29, 2000 and is incorporated herein by reference)
C. Agreement and Plan of Merger among Computer Sciences Corporation,
Patriot Acquisition Corporation and Policy Management Systems Corporation dated
June 20, 2000 (filed as an exhibit to Schedule 14-D9/A dated July 19, 2000 and
is incorporated herein by reference)
3. ARTICLES OF INCORPORATION AND BY-LAWS
A. Bylaws of the Company, as amended through September 2, 1999 incorporating
all amendments thereto subsequent to July 19, 1994 (filed as an Exhibit to Form
10-Q for the quarter ended September 30, 1999, 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)
39
<PAGE>
10. MATERIAL CONTRACTS
A. Conformed copy of Development and Marketing Agreement between
International Business Machines Corporation and Policy Management Systems
Corporation, dated July 26, 1989 (File No. 0-10175 - filed under cover of Form
SE filed on September 29, 1989, and is incorporated herein by reference)
B. Policy Management Systems Corporation 1989 Stock Option Plan (File No.
0-10175 - filed under cover of Form SE on March 22, 1991, and is incorporated
herein by reference)
C. Deferred Compensation Agreement with G. Larry Wilson (filed as an Exhibit
to Form 10-K for the year ended December 31, 1993, and is incorporated herein by
reference)
D. Employment Agreement with Stephen G. Morrison (filed as an Exhibit to
Form 10-Q for the quarter ended March 31, 1994, and is incorporated herein by
reference)
E. Stock Option/Non-Compete Agreement with Stephen G. Morrison (filed as an
Exhibit to Form 10-Q for the quarter ended March 31, 1994, and is incorporated
herein by reference)
F. Employment Agreement with Timothy V. Williams (filed as an Exhibit to
Form 10-K for the year ended December 31, 1994, and is incorporated herein by
reference)
G. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1992, and
is incorporated herein by reference)
H. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1994, and
is incorporated herein by reference)
I. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is
incorporated herein by reference)
J. Policy Management Systems Corporation 1993 Long-Term Incentive Plan for
Executives (filed as an Exhibit to Form 10-K for the year ended December 31,
1994, and is incorporated herein by reference)
K. First Amendment to the Policy Management Systems Corporation 1989 Stock
Option Plan (filed as an Exhibit to Form 10-K for the year ended December 31,
1994, and is incorporated herein by reference)
L. Fourth Amendment to the Policy Management Systems Corporation 1989 Stock
Option Plan (filed as an Exhibit to Form 10-Q for the quarter ending March 31,
1995, and is incorporated herein by reference)
M. Second and Third Amendments to the Policy Management Systems Corporation
1989 Stock Option Plan (filed as an Exhibits and to Form 10-Q for the quarter
ended June 30, 1995, and is incorporated herein by reference)
40
<PAGE>
N. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1995, and is
incorporated herein by reference)
O. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-K for year ended December 31, 1995, and is
incorporated herein by reference)
P. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-K for year ended December 31, 1995, and is
incorporated herein by reference)
Q. Stock Option/Non-Compete Agreement with Timothy V. Williams dated
February 1, 1994 (filed as an Exhibit to Form 10-K for year ended December 31,
1995, and is incorporated herein by reference)
R. Stock Option/Non-Compete Agreement with Timothy V. Williams dated May 10,
1995 (filed as an Exhibit to Form 10-K for year ended December 31, 1995, and is
incorporated herein by reference)
S. Registration Rights Agreement, dated March 8, 1996, between Policy
Management Systems Corporation and Continental Casualty Company (filed as an
Exhibit to Form 10-Q for the quarter ended March 31, 1996, and is incorporated
herein by reference)
T. Shareholders Agreement dated March 8, 1996 between Policy Management
Systems Corporation and Continental Casualty Company (filed as an Exhibit to
Form 10-Q for the quarter ended March 31, 1996, and is incorporated herein by
reference)
U. Stock Option/Non-Compete Form Agreement for named executive officers
Together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1996, and is
incorporated herein by reference)
V. Employment Agreement Form dated November 7, 1996 for Messrs.
Morrison and Williams together with a schedule identifying particulars for each
executive officer (filed as an Exhibit to Form 10-K for year ended December 31,
1996 and is incorporated herein by reference)
W. Stock Option/Non-Compete Agreement with Stephen G. Morrison dated
October 22, 1996 (filed as an Exhibit to Form 10-K for year ended December 31,
1996 and is incorporated herein by reference)
X. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each executive officer (filed
as an Exhibit to Form 10-Q for the quarter ended March 31, 1997 and is
incorporated herein by reference)
Y. Form of Amendment No. 1 to the Employment Agreements with Messrs.
Morrison and Williams, together with schedule identifying particulars for each
executive officer (filed as an Exhibit to Form 10-Q for Quarter ended June 30,
1997 and is incorporated herein by reference)
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Z. Form of Employment Agreements with Messrs. Wilson and Bailey,
together with schedule identifying particulars for each executive officer (filed
as an Exhibit to Form 10-Q for Quarter ending September 30, 1997 and is
incorporated herein by reference)
AA. Credit Agreement dated as of August 8, 1997 among Policy Management
Systems Corporation, the Guarantors Party hereto, Bank of America National Trust
and Savings Association and the Other Financial Institution Party Hereto (filed
as an Exhibit to Form 10-Q for Quarter ending September 30, 1997 and is
incorporated herein by reference)
BB. Stock Option/Non-Compete Form Agreement for named executive
officers together with schedule identifying particulars for each named executive
officer (filed as an Exhibit to the Form 10-Q for the quarter ended March 31,
1998, and is incorporated herein by reference)
CC. Policy Management Systems Corporation Restricted Stock Ownership
Plan (filed as an Exhibit to Form 10-Q for Quarter ended September 30, 1998 and
is incorporated herein by reference)
DD. Form of Restricted Stock Award Agreement dated August 11, 1998 with
Messrs. Berkeley, Feddersen, Palms, Sargent, Seibels and Trub (filed as an
Exhibit to Form 10-Q for Quarter ended September 30, 1998 and is incorporated
herein by reference)
EE. Employment Agreement with Michael W. Risley dated February 23,
1999, effective November 10, 1998 (filed as an Exhibit to Form 10-K for the year
ended December 31, 1998 and is incorporated herein by reference)
FF. Form of Restricted Stock Award Agreement dated March 1, 1999 with
Messrs. Berkeley, Feddersen, Palms, Sargent, Seibels and Trub (filed as an
Exhibit to Form 10-Q for Quarter ending March 31, 1999 and is incorporated
herein by reference)
GG. Form of Restricted Stock Award Agreement for named executive
officers together with schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-Q for Quarter ending March 31, 1999 and
is incorporated herein by reference)
HH. Stock Option/Non-Compete Form Agreement for named executive
officers together with schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-Q for Quarter ending June 30, 1999 and
is incorporated herein by reference)
II. Stock Option/Non-Compete Form Agreement with Michael W. Risley
dated May 11, 1999 (filed as an Exhibit to Form 10-Q for Quarter ending June 30,
1999 and is incorporated herein by reference)
JJ. Form of 1999 Bonus Plan for named executive officers together with
schedule identifying particulars for each named executive officer (filed as an
Exhibit to Form 10-Q for Quarter ending June 30, 1999 and is incorporated herein
by reference)
KK. Promissory Note dated July 21, 1999 between Policy Management
Systems Corporation and First Union National Bank (filed as an Exhibit to Form
10-Q for Quarter ending September 30, 1999 and is incorporated herein by
reference)
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LL. Modification Number One dated October 15, 1999 to the Promissory
Note between Policy Management Systems Corporation and First Union National Bank
dated July 21, 1999 (filed as an exhibit to Form 10-K for the year ended
December 31, 1999 and is incorporated herein by reference)
MM. Modification Number Two dated October 28, 1999 to the Promissory
Note between Policy Management Systems Corporation and First Union National Bank
dated July 21, 1999 (filed as an exhibit to Form 10-K for the year ended
December 31, 1999 and is incorporated herein by reference)
NN. Stock Option/Non-Compete Form Agreement dated May 11, 1999 for
named executive officers together with schedule identifying particulars for each
named executive officer (filed as an exhibit to Form 10-K for the year ended
December 31, 1999 and is incorporated herein by reference)
OO. Stock Option/Non-Compete Form Agreement dated August 9, 1999 with
Mr. Harald J. Karlsen (filed as an exhibit to Form 10-K for the year ended
December 31, 1999 and is incorporated herein by reference)
PP. Stock Option/Non-Compete Form Agreement dated November 8, 1999 for
named executive officers together with schedule identifying particulars for each
named executive officer (filed as an exhibit to Form 10-K for the year ended
December 31, 1999 and is incorporated herein by reference)
QQ. Form of Restricted Stock Award Agreement dated February, 1999 for
Mr. Michael D. Gantt (filed as an exhibit to Form 10-K for the year ended
December 31, 1999 and is incorporated herein by reference)
RR. Change in Control Severance Pay Plan for Select Employees dated
October 22, 1996 together with schedule identifying particulars for Michael D.
Gantt and Harald J. Karlsen (filed as an exhibit to Form 10-K for the year
ended December 31, 1999 and is incorporated herein by reference)
SS. Term Loan Agreement between Policy Management Systems Corporation,
the Guarantors Party, Bank of America, N.A. and other financial institutions in
the amount of $70 million dated November 5, 1999 (filed as an exhibit to Form
10-K for the year ended December 31, 1999 and is incorporated herein by
reference)
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TT. Form of Restricted Stock Award Agreement dated March 1, 2000 with
Messrs. Berkeley, Feddersen, Palms, Sargent and Trub with schedule identifying
particulars for each named Director (filed as an exhibit to Form 10-Q for the
Quarter ended March 31, 2000 and is incorporated herein by reference)
The Schedule for TT contained the following:
Named Director Number Granted
--------------- ---------------
Al Berkeley 1,491
Don Feddersen 1,491
John Palms 1,491
Joe Sargent 1,491
Richard Trub 1,491
UU. First Amendment to the Credit Agreement dated as of November 5,1999,
between Policy Management Systems Corporation, Bank of America, N.A. and the
other financial institutions thereto Director (filed as an exhibit to Form
10-Q for the Quarter ended March 31, 2000 and is incorporated herein by
reference)
VV. Second Amendment to the Credit Agreement dated as of February 10,
2000 between Policy Management Systems Corporation, Bank of America, N.A. and
the other financial institutions thereto (filed as an exhibit to Form 10-Q for
the Quarter ended March 31, 2000 and is incorporated herein by reference)
WW. Third Amendment to the Credit Agreement dated as of March 30, 2000
between Policy Management Systems Corporation, Bank of America, N.A. and the
other financial institutions thereto (filed as an exhibit to Form 10-Q for the
Quarter ended March 31, 2000 and is incorporated herein by reference)
XX. Fourth Amendment to the Credit Agreement dated as of April 24, 2000
between Policy Management Systems Corporation, Bank of America, N.A. and the
other financial institutions thereto (filed as an exhibit to Form 10-Q for the
Quarter ended March 31, 2000 and is incorporated herein by reference)
YY. First Amendment to Term Loan Agreement dated as of February 10,
2000 between Policy Management Systems Corporation, Bank of America, N.A. and
the other financial institutions thereto (filed as an exhibit to Form 10-Q for
the Quarter ended March 31, 2000 and is incorporated herein by reference)
ZZ. Second Amendment to Term Loan Agreement dated as of March 30, 2000
between Policy Management Systems Corporation, Bank of America, N.A. and the
other financial institutions thereto (filed as an exhibit to Form 10-Q for the
Quarter ended March 31, 2000 and is incorporated herein by reference)
AAA. Third Amendment to Term Loan Agreement dated as of April 24, 2000
between Policy Management Systems Corporation, Bank of America, N.A. and the
other financial institutions thereto (filed as an exhibit to Form 10-Q for the
Quarter ended March 31, 2000 and is incorporated herein by reference)
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<PAGE>
BBB. Security Agreement dated as of April 28, 2000, among Policy
Management Systems Corporation, certain of its subsidiaries, and Bank of
America, N.A., as Administrative Agent (filed as an exhibit to Form 10-Q for the
Quarter ended March 31, 2000 and is incorporated herein by reference)
CCC. Pledge Agreement dated as of April 28, 2000, between Policy Management
Systems Corporation, certain of its subsidiaries, and Bank of America, N.A., as
Administrative Agent (filed as an exhibit to Form 10-Q for the Quarter ended
March 31, 2000 and is incorporated herein by reference)
DDD. Mortgage Agreement dated as of April 28, 2000, between Policy
Management Systems Corporation and Bank of America, N.A., as Administrative
Agent (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and
is incorporated herein by reference)
EEE. Form of Employee Stock Option/Non Compete Agreement dated April 3,2000
with schedule identifying particulars for each named officer (filed herewith)
The Schedule for EEE [57] contained the following:
OFFICERS OPTIONS RECEIVED
-------- -----------------
David T. Bailey 35,000
Michael D. Gantt 35,000
Harald J. Karlsen 25,000
Stephen G. Morrison 35,000
Michael W. Risley 35,000
Timothy V. Williams 35,000
G. Larry Wilson 75,000
FFF. Form of Memorandum regarding Grant of 15,000 Stock Options dated
April 5, 2000 with schedule identifying particulars for each director
(filed herewith)
The Schedule for FFF [58] contained the following:
DIRECTORS
---------
Alfred R. Berkeley, III
Donald W. Feddersen
Dr. John M. Palms
Joseph D Sargent
John P. Seibels
Richard G. Trub
GGG. Consent and Waiver dated June 19, 2000 relating to the Credit
Agreement between Policy Management Systems Corporation, the Guarantors, Bank of
America, N.A., and the other financial institutions thereto (filed herewith)
HHH. Consent, Waiver and Amendment dated June 19, 2000 relating to the
Term Loan Agreement between Policy Management Systems Corporation, the
Guarantors, Bank of America, N.A., and the other financial institutions thereto
(filed herewith)
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III. Consent and Waiver dated June 20, 2000 relating to the Credit
Agreement between Policy Management Systems Corporation, the Guarantors, Bank of
America, N.A., and the other financial institutions thereto (filed herewith)
JJJ. Consent and Waiver dated June 20, 2000 relating to the Term Loan
Agreement between Policy Management Systems Corporation, the Guarantors, Bank of
America, N.A., and the other financial institutions thereto (filed herewith)
KKK. Consent, Waiver and Fifth Amendment to Credit Agreement dated July
14, 2000 between Policy Management Systems Corporation, the Guarantors, Bank of
America, N.A., and the other financial institutions thereto (filed herewith)
LLL. Consent and Waiver dated July 14, 2000 relating to the Term Loan
Agreement between Policy Management Systems Corporation, the Guarantors, Bank of
America, N.A., and the other financial institutions thereto (filed herewith)
MMM. Fifth Amendment to Term Loan Agreement dated as of August ___, 2000
between Policy Management Systems Corporation, Bank of America, N.A., the
Guarantors, and the other financial institutions thereto (filed herewith)
NNN. Sixth Amendment to the Credit Agreement dated as of August __,
2000 between Policy Management Systems Corporation, Bank of America, N.A., the
Guarantors, and the other financial institutions thereto (filed herewith)
OOO. Subordination Agreement dated June 20, 2000 between Computer Sciences
Corporation, Bank of America, N.A. and Policy Management Systems Corporation
(filed herewith)
PPP. Promissory Note dated June 20, 2000 by Policy Management Systems
Corporation in favor of Computer Sciences Corporation (filed herewith)
QQQ. Working Capital Promissory Note dated August 3, 2000 by Policy
Management Systems Corporation in favor of Computer Sciences Corporation (filed
herewith)
27. FINANCIAL DATA SCHEDULE
A. Filed herewith
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