UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999 Commission file number 1-10557
POLICY MANAGEMENT SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0723125
(State or other jurisdiction of ( IRS Employer
Incorporation or organization) Identification No.)
ONE PMSC CENTER (PO BOX TEN)
BLYTHEWOOD, SC (COLUMBIA, SC) 29016 (29202)
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(803) 333-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK
EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 No.
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K..
-
The aggregate market value of the voting stock held by non-affiliates of
the registrant was $355,860,380 at April 14, 2000, based on the closing market
price of the Common Stock on such date, as reported by the New York Stock
Exchange.
The total number of shares of the registrant's Common Stock, $.01 per share par
value, outstanding at April 14, 2000, was 35,586,038.
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
ITEM 1. BUSINESS
THE COMPANY
ORGANIZATION AND GENERAL DEVELOPMENT
Policy Management Systems Corporation (the "Company"), a leading provider
of enterprise software and electronic commerce systems, related professional
services, and business process outsourcing designed to meet the needs of the
global insurance and related financial services industries, is a South Carolina
corporation incorporated in 1980. From 1974 until 1980, the Company operated as
a division of Seibels, Bruce & Company.
The Company initially operated as a provider of insurance software systems
and related automation support services to the property and casualty insurance
market in the United States and Canada. Over time, the Company has expanded
geographically into Europe, Asia, Australia, Africa and Latin America as well as
into the life insurance and related financial services markets. Through
internal development and acquisitions, the Company has expanded its software
products and services offerings which include advanced computing technologies,
strategic alliances, and outsourcing solutions, thereby strengthening the
Company's ability to serve the global insurance marketplace.
BUSINESS STRATEGY
The Company's business strategy is to offer value to customers by
structuring long-term relationships and agreements that provide its customers
with continuously updated solutions, while providing a high degree of recurring
revenues to the Company. During the early stages of the Company's development,
a major portion of its revenues was derived from systems licensing activities.
The Company has continued to expand as a provider of a full range of business
solutions to the global insurance and financial services industries and now the
majority of the Company's revenues are derived from outsourcing and professional
services activities.
NAME CHANGE
On January 21, 2000, the Company announced its intent to change the name of
the Company to Mynd Corporation. Approval requires a two-thirds vote of the
shareholders at a shareholders meeting to be scheduled. If approved by the
shareholders, the Company will formally change its legal name with relevant
authorities including the New York Stock Exchange. Meanwhile, management
intends to proceed with a campaign to promote acceptance and awareness of the
new name.
SOFTWARE PRODUCTS
The Company offers over 100 business solutions, which include more than 80
application software systems, designed to meet the needs of the global insurance
and related financial services markets.
The Company's software products automate most insurance processing functions,
including various underwriting, claims, accounting, financial reporting,
regulatory reporting and cash management functions. The systems have been
designed to permit ease of use, providing flexibility in adapting to a
customer's specific requirements. The systems are also designed to be modular
in structure and to facilitate the application of updates and enhancements, as
well as the interfacing and integration with different systems. Most of the
Company's applications will operate on either a stand-alone basis or in
conjunction with other applications in the same product group.
The Company's primary software systems currently run on midrange and mainframe
hardware with personal computers. The Company also supports an open systems
strategy, which provides for the host-based software components to be converted
to certain open platforms, allowing customers the capability of adding
cost-effective increments of processing power. The Company's systems
incorporate object-oriented technology and most applications are
Internet-enabled (see Product Development).
The Company's enterprise systems represent comprehensive administrative
offerings for the property and casualty and life insurance markets. A primary
advantage of the Company's software products is the full integration of the
information and data gathering, processing, underwriting, claims handling and
reporting processes for insurance providers and self-insureds, creating a
cooperative processing environment. In this environment, insurance
professionals are capable of processing multiple tasks concurrently with minimal
clerical support and data entry. The Company's software products utilize
technologies such as relational databases, graphical user interfaces,
object-oriented programming, imaging and web browser enablement. The Company's
objective is to provide software systems that allow system upgrades, additions
and interfaces to be implemented quickly, with minimal disruption to ongoing
operations.
The Company obtains licenses from third parties for a wide range of software
products and services, which are required in varying degrees to develop and
enhance the Company's products and in performing services for its customers.
Such products range from mainframe operating systems to graphical user
interfaces.
The Company's primary software systems, as well as some of its newest product
offerings, are discussed below.
Series III uses relational databases and cooperative processing between
hardware platforms and allows access to data from multiple sources through
advanced networks to provide both a comprehensive solution for all facets of the
property and casualty insurance industry worldwide and a flow of information
between insurance agents, branch offices and the home office of insurance
companies. The completion of Release 9.1 of Series III marked the first release
of Series III functionality utilizing the Microsoft Windows NT operating
system and resulted in it being renamed S3+ (All subsequent references to
Series III will be S3+). S3+ is currently able to support business processing
for personal lines (primarily auto and homeowners' policies) and commercial
lines (Commercial Auto, Commercial Package Policy, Commercial Property, Crime,
Liability, and Inland Marine) for the property and casualty insurance industry
in a Windows NT environment. The continued development of S3+ will focus on
enhancements of existing functionality and incorporating Windows NT operating
system capability with eBusiness solutions. The S3+ product line includes
several eBusiness-based products including PMSCiSolutions , Business
Intelligence Solutions , Document Solutions , and Media View .
The Company also continues to provide solutions to the property and casualty
insurance industry through its Series II products, an earlier generation of
solutions, which are traditional mainframe computer products. Series II
products have been enhanced with the capability of handling transactions with
dates of the year 2000 and beyond.
The POINT System, the Company's midrange solution for the United States
property and casualty insurance market, has been re-engineered to utilize
client/server capabilities featuring a graphical user interface client. The
re-engineered POINT System, renamed Point+ , utilizes object-oriented technology
and is offered on International Business Machines Corporation's ("IBM") AS/400
and Windows NT.
INSURE/90 , an IBM AS/400-based product acquired with Creative Holdings Group,
Limited ("Creative") in 1994, became part of the Company's general insurance
software solution to the European, Asian and Australian markets. The next
generation of applications to ultimately replace the INSURE/90 product is I+ .
I+ increases functionality and offers client/server capabilities.
The Company's acquisition of CYBERTEK Corporation ("CYBERTEK") in August 1993
provided the Company with the CK/4 Enterprise Solution , an integrated solution
for the life insurance industry. In March 1995, the Company made generally
available the first release of CyberLife , an integration of CK4 functionality
with client/server technology. The Company's subsequent releases of CyberLife's
scalable platforms include those
capable of processing on PC local area networks ("LANs") or on IBM mainframe
hardware, and client processes executing in a Windows environment.
In 1995, the Company purchased rights to Internet technology known as ViLink
Electronic Commerce Platform ("ViLink"), a tool for rapid development of web
sites based on insurance data. ViLink has enjoyed broad market acceptance in
the life insurance and related financial services industries.
The Company's acquisition of The Leverage Group, Inc. ("TLG") in 1998 provided
the Company with PolicyLink . PolicyLink is deployable in a LAN and UNIX
environment and is browser-enabled. This client-server system supports life
insurance and complex variable annuity products.
During 1998, the Company shipped PMSCiSolutions, its first interactive
Internet-based application for the property and casualty industry. This product
extends the processing capabilities of the Company's systems to new audiences
such as agents and consumers. Future releases of PMSCiSolutions will provide
additional functionality for the Company's administrative applications.
Since April 1998, the Company has offered LoanXchange to the financial services
industry. LoanXchange is a fully integrated client/server mortgage origination
and underwriting platform for both retail and wholesale organizations. During
1999, the Company began offering the LoanXchange.com ("LX.com") as an Internet
business-to-business loan origination service. LX.com uses the Internet to
connect mortgage brokers to lenders and accelerates the origination process.
Claims Outcome Advisor ("COA") is a claims and benefits solution that
facilitates the management of long-term disability or other work-related injury
claims costs. This solution maps medical and job-related information to create
possible return to work scenarios. COA covers workers' compensation claims and
bodily injury claims.
The Company's acquisition of DORN Technology Group, Inc. ("DORN"), in June 1999,
provided the Company with Claims Extended Edition/RISKMASTER , a risk management
solution for self-insured organizations. Using Claims Extended Edition, a
claims examiner, risk manager, or loss control specialist can perform and
document each phase of the claims process electronically.
In March 1999, the Company's acquisition of Legalgard Partners, LP ("Legalgard")
provided the technical foundation for Litigation/Advisor, a fully functional
litigation cost management system. It includes components that assist companies
in litigation cost and budget management, bill submission, guideline compliance
coding and bill analysis, and analytical and management reporting.
PRODUCT SUPPORT
Most customers initially licensing the Company's software systems pay a
monthly license fee which entitles the customer to Maintenance, Enhancements and
Services Availability ("MESA"). Under the maintenance provisions of MESA, the
Company provides telephone support and error correction to current base versions
of licensed systems. The enhancement provisions of MESA provide unspecified
additions or modifications to the licensed systems, if and when they become
generally available as a result of the Company's continuing research and
development efforts. Services availability allows customers access to
professional services, other than maintenance and enhancements, which are
provided under separate arrangements during the MESA term.
PROFESSIONAL SERVICES
The Company provides, on a time and materials basis, and in some circumstances
under fixed-price arrangements, professional consulting and other services
including needs analysis, implementation, modification, project management and
programming. In addition, the Company provides a full range of training
programs to customers using its products and technology.
SOURCING
The Company offers information technology outsourcing ("ITO") services from
its data centers located in North America, Europe and Australia. These services
range from providing processing capabilities for highly regulated lines of
business to providing complete processing capabilities for all or most of a
customer's business. The services range from making available software systems
licensed from the Company on a remote basis, to assuming complete systems
management, processing and administration support responsibilities for a
customer. ITO services are typically provided under contracts having terms from
three to ten years.
The Company also offers Business Process Outsourcing ("BPO") services,
addressing the complete back office processing of insurance transactions from
mailroom to policy issuance. By combining advanced technologies with
re-engineered workflows, the Company is able to bring an increased level of
efficiency to its customers' business processes. Entrusting these processes to
the Company allows customers to take advantage of these efficiencies and focus
resources on core competencies. BPO services are typically provided under
contracts having terms from three to ten years.
PRODUCT DEVELOPMENT
Historically, the computer software and services industry has experienced
rapid technological changes in hardware and software. Additionally, the
insurance industry is constantly subject to regulatory changes and new
requirements. This combination of changes requires the Company to continuously
develop new products and enhancements to existing products to meet the
automation needs of the global insurance and related financial services
industries.
Over the last two decades, within the insurance and related financial
services industries, technology has progressed from mainframe computing to
client-server and now is rapidly embracing eBusiness utilizing the Internet.
Examples of the Company's continuing product development efforts to address
these movements in technology are as follows:
Although development efforts for S3+ for the property and casualty insurance
industry will continue, the majority of the functional components of S3+ have
been delivered since research began in 1987. With the completion of Release
8.0a in 1997, Series III offers a comprehensive functional solution to the
property and casualty industry worldwide in an IBM OS/2 operating system
environment. With the completion of Release 2.0 in 2000, S3+ offers a similarly
comprehensive solution on the Windows NT platform. The Company has adopted
object-oriented technology for current and future application development. As
such, it is the Company's goal that every new development project uses the same
technology and architecture to create new insurance objects. S3+ incorporates
object-oriented technology and also supports the Microsoft Windows NT operating
system. During the 1999 third quarter, the Company determined that future
development and enhancements would no longer be directed toward OS/2.
The development of CyberLife has represented a significant investment for
the Company. Beginning with the existing functionality of the CK/4 Enterprise
Solution, this development has involved creating a new architecture and expanded
capabilities employing object-oriented development techniques and other
leading-edge technologies making it a client/server enterprise-wide system for
the life insurance and related financial services industries. CyberLife's
underlying technologies include expert systems, relational databases, real-time
processing, and multi-platform implementations. The system is designed to be
scalable from IBM mainframes to LAN server platforms and is accessible via
multiple forms of user interfaces.
As part of this development effort and consistent with the Company's desire to
reuse its computer code, a number of the Company's other products, including the
Client Information System , DecisionXchange system and ViLink Electronic
Commerce Platform, have been integrated with CyberLife. This eliminates the
need to develop similar functionality within CyberLife. DecisionXchange and
ViLink are also being integrated with PolicyLink in the LAN environment.
Since April 1998, the Company has offered LoanXchange to the financial
services industry. LoanXchange is a fully integrated client/server mortgage
origination and underwriting platform for both retail and wholesale
organizations. During 1999, the Company integrated functionality from
DecisionXchange and ViLink to begin offering an Internet service called the
LoanXchange.com.
While the Company intends to continue to develop applications for IBM
architecture platforms, it also supports open systems. For example, during
1998, the Company entered into an alliance with Microsoft (see "Strategic
Alliances" below). This open systems approach, which allows the host-based
components to be converted to various platforms, will allow separate software
products to be integrated with one another, as well as with the customer's
existing and future systems, whether provided by the Company or other vendors.
COA is one of the Company's first claims and risk management solutions. This
Microsoft-compatible solution combines medical information and occupational
skills to produce return-to-work plans.
The Company recently added PMSCiSolutions to its list of Internet-based
products. PMSCiSolutions enables insurance companies to participate in
eBusiness. It provides real-time Internet processing to agents and consumers.
In an effort to maintain and strengthen its competitive position, the Company
invests substantial amounts in internal product development. Capitalized
internal product development expenditures were $67.1, $59.6 and $62.5 million in
1999, 1998 and 1997, representing 10.4%, 9.8% and 12.1% of total revenues,
respectively. Amounts capitalized by business segment: property and casualty,
$27.0 million; life and financial solutions, $19.2 million; international, $20.9
million.
During 1998 and 1999, the Company recorded significant write-offs and
write-downs of previously capitalized software development costs (see "Special
Charges and Accounting Changes" in Management's Discussion and Analysis of
Financial Condition and Results of Operations).
The Company intends to continue to expand its product and services offerings
through internal development and acquisitions.
MARKETING AND CUSTOMERS
The Company primarily markets its products and services to more than 1,000
property and casualty and life insurance companies, independent insurance agents
and adjusters and financial institutions. In addition, the Company offers its
software products and automation and administration support services in 37
countries. No single customer accounted for more than 10% of revenues during
the year ended December 31, 1999.
The Company markets its products and services through a staff of
approximately 170 employees, including sales and marketing support personnel,
most of who are specialists in the insurance industry and information
technology. The Company's marketing force works extensively with each
prospective customer to assist in analyzing its specific requirements.
Consequently, the sales cycle for a prospective customer seeking a major
automation based solution may extend up to 18 months.
In addition to its own software products, the Company markets certain third
party software and hardware products to its customers. Typically, these
software products are designed to perform noninsurance functions or to improve
the control and productivity of computer resources. The Company is a reseller
of certain standard hardware used to operate various of its software systems.
LICENSES AND PRODUCT PROTECTION
The Company's revenues are generated principally by licensing standardized
insurance software systems and providing outsourcing and professional services
to the global insurance and financial services industries.
Software systems are licensed under the terms of substantially standard
nonexclusive and nontransferable agreements, which generally have a
noncancelable minimum term of six years and provide for an initial license
charge and a monthly license charge. The initial license charge grants a right
to use the software system available at the time the license is signed. The
monthly license charge provides the right to use the software and access to MESA
during the term of the license agreement (see description above under Product
Support and Services). Customers wishing to acquire perpetual rights to use the
Company's software enter into additional agreements to acquire such rights.
The Company relies upon contract, copyright and other bodies of law to protect
its products as trade secrets and confidential proprietary information. The
Company's agreements with its customers and prospective customers prohibit
disclosure of the Company's trade secrets and proprietary information to third
parties without the consent of the Company and generally restrict the use of the
Company's products to only the customers' operations. The Company also informs
its employees of the proprietary nature of its products and obtains from them an
agreement not to disclose trade secrets and proprietary information.
Notwithstanding those restrictions, it may be possible for competitors of the
Company to obtain unauthorized access to the Company's trade secrets and
proprietary information.
The Company owns numerous trademarks and service marks which are used in
connection with its business in all segments. These trademarks are important to
its business. Depending upon the jurisdiction, the Company's trademarks are
valid as long as they are in use and/or their registrations are properly
maintained and they have not been found to have become generic. Registrations
of these trademarks can generally be renewed indefinitely as long as the
trademarks are in use.
COMPETITION
The computer software and services industry is highly competitive. Based
upon its knowledge of the industry, the Company believes it is a leading
provider of enterprise and electronic commerce application software,
professional services, and outsourcing designed to meet the needs of the global
insurance and related financial services industries. Very large insurers, that
internally develop systems similar to those of the Company may or may not become
major customers of the Company for software. There are also a number of
independent companies that offer software systems that perform certain, but not
all, of the functions performed by the Company's systems.
There are a number of larger companies, including computer services, software
and outsourcing companies, consulting firms, computer manufacturers, and
insurance companies, that have greater financial resources than the Company and
possess the technological ability to develop software products similar to those
offered by the Company. These companies present a significant competitive
challenge to the Company's business. The Company competes on the basis of its
service, system functionality, performance, technological advances and price.
ACQUISITIONS AND GEOGRAPHIC EXPANSION
International customers and marketplaces are essential to the Company
maintaining its position as a leading provider of insurance automation solutions
and systems and related professional services to the global insurance industry.
The Company opened its Canadian office in 1977 and, since that time, has
expanded operations to include Europe, Asia, Australia, Africa and Latin
America. The Company currently has customers in 37 countries (see Segment
Information).
Between 1985 and 1994, the Company expanded operations through acquisitions in
adjacent markets and internationally. Most significantly, these early
acquisitions established the basis for the Company's presence in the life and
financial solutions segment and in Europe.
In October 1995, the Company increased its European presence by purchasing
micado Beteiligungs-und Verwaltungs GmbH ("micado") headquartered in Germany.
micado provides services and software to German insurance and financial services
companies.
In October 1996, the Company acquired certain assets of Co-Cam Pty Ltd.,
headquartered in Melbourne, Australia, as a means to further strengthen its
presence in the Asian and Australian marketplaces.
In August 1998, the Company acquired TLG, headquartered in Hartford,
Connecticut. TLG owns PolicyLink, a family of systems designed to support the
administrative tasks associated with administration, commission processing,
payout processing, and disbursement generation for life insurance and annuity
contracts. This acquisition provides the Company with a LAN and UNIX based
solution supporting non-traditional life and financial services products.
In December 1998, the Company acquired CAF Systemhaus fur
Anwendungsprogrammierung GmbH ("CAF") and related entities. CAF, headquartered
in Gilching, Germany, owns Visual Project Modeling Systems ("VP/MS"). VP/MS is
designed to allow insurance companies to easily design and implement computer
code to administer new insurance products with reduced programming cost and time
to market.
In March 1999, the Company purchased Legalgard, a legal cost containment
business headquartered in Philadelphia, Pennsylvania. Legalgard provides legal
cost containment services mainly to the US property and casualty insurance
industry using the Counsel Partnership System, a proprietary software system.
The Company intends to grow Legalgard's existing services business and has
developed the Counsel Partnership System into the Litigation Advisor System for
licensing directly to insurance companies.
In June 1999, the Company purchased DORN, a risk and claims management
company headquartered in Detroit, Michigan. DORN owns the Riskmaster claims
management software and the Quest healthcare facility software, and provides
risk and claims management software and services mainly to the US self-insured
market. The Company intends to grow DORN's existing business and further develop
the Riskmaster and Quest systems to complement its suite of claims products.
In June 1999, the Company purchased Financial Administrative Services, Inc.
("FAS"), a BPO provider for the life and related financial services industry.
Headquartered in Hartford, Connecticut, FAS uses the Company's PolicyLink system
to support the rapid introduction of variable insurance products and annuities
in a business process outsourcing environment.
STRATEGIC ALLIANCES
Microsoft. Microsoft and PMSC continue to work together to incorporate
Microsoft's key technologies into existing and new application solutions offered
by PMSC. Since the alliance between Microsoft and PMSC was announced in 1998,
PMSC has delivered to the insurance and related financial services industries
several new Microsoft-based products such as COA, Litigation Advisor, and
PMSCiSolutions, and released enhancements to existing products, specifically S3+
and Point+ that support Microsoft's technology.
Lockheed Martin Corporation. The Company formed a strategic alliance for
systems outsourcing with Integrated Business Solutions, a unit of Lockheed
Martin Corporation ("Lockheed Martin"). In June 1998, a Data Processing
Services Agreement was completed and under its terms, the Company turned over
operation of its Blythewood, South Carolina, data center to Lockheed Martin.
SEGMENT INFORMATION
The Company has classified its operations into five operating segments.
The operating segments are the five revenue-producing components of the Company
for which separate financial information is produced for internal decision
making and planning purposes. The segments are as follows:
1. Property and casualty enterprise software and services (generally
referred to as "property and casualty"). This segment provides software
products, product support, professional services and outsourcing primarily to
the US property and casualty insurance market.
2. Life and financial solutions enterprise software and services (generally
referred to as "life and financial solutions"). This segment provides software
products, product support, professional services and outsourcing primarily to
the US life insurance and related financial services markets.
3. International. This segment provides software products, product support,
professional services and outsourcing to the property and casualty and life
insurance markets primarily in Europe, Asia, Australia and Canada.
4. Property and casualty information services. This segment provided
information services, principally motor vehicle records and claims histories, to
US property and casualty insurers. It was sold in August 1997.
5. Life information services. This segment provided information services,
principally physician reports and medical histories, to US life insurers. It
was sold in May 1998.
The majority of the Company's revenues are generated from products and
services provided in the United States, although the Company does have customers
in a total of 37 countries. The following table illustrates the relative
percentages of total revenue represented by the Company's products and services
by geographic region.
Percent of Revenue
Year Ended December 31,
-------------------------------
1999 1998 1997
----- ----- ----
United States . . . 72.8% 70.7% 66.4%
Europe. . . . . . . 21.4 21.9 25.2
Asia and Australia. 4.6 5.5 6.3
Other International 1.2 1.9 2.1
Additional information regarding operating segments and geographic areas is
contained in Note 13 of Notes to Consolidated Financial Statements.
SEASONALITY
For discussion of seasonality, see Seasonality and Inflation in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
EMPLOYEES
At April 13, 2000, the Company had 5,625 full-time employees and 5,805
total employees located in offices worldwide. This reflects a reduction in
force of 369 employees the Company announced in February 2000.
ITEM 2. PROPERTIES
The Company owns its 867,000 square foot headquarters complex located on
145 acres in Blythewood, South Carolina. The Company leases space at 32 various
locations for its regional and branch offices throughout the United States.
Internationally, the Company leases space at 37 locations throughout Canada,
Europe, Africa, Asia, Australia and New Zealand. Generally, the international
properties support the international segment and the domestic properties support
all segments.
In July 1998, the Company turned over operation of its Blythewood, South
Carolina data center to Lockheed Martin. This data center has 3 mainframe and 6
mid-range computers, which have over 8 terabytes of disk storage and are capable
of processing over 841 million instructions per second and 2,731 commercial
processing workloads, respectively. The Company is currently utilizing 77% of
the mainframe capacity and 95% of mid-range capacity.
The Company's data center in Bergen, Norway has one mainframe computer, which
has over 1.5 terabytes of disk storage and is capable of processing over 265
million instructions per second. The Company is currently utilizing 80% of this
capacity.
The Company's data center in Melborne, Australia has various UNIX systems which
have over 120 gigabytes of disk storage and is capable of processing 90,000
transactions per minute. The Company is currently utilizing 85% of this
capacity.
The Company's data center in Sydney, Australia has 4 mid-range computers
with over 150 gigabytes of disk storage and is capable of 190 commercial
processing workloads. The Company is currently utilizing 80% of this capacity.
The Company uses a private common access network to support its operations. The
network is tied together through a backbone located at headquarters in
Blythewood, South Carolina, with hubs in Europe and Australia. The backbone
accommodates all connectivity requiring access to multiple systems or sites and
remote operations including international locations.
Remote connectivity to the backbone is accomplished through a Wide Area
Network ("WAN") using point to point, frame relay, and dial-up connectivity.
Operation and maintenance of the WAN is outsourced to Lockheed Martin. The
Internet is accessed through T-1 connections and local ISP's. Security is
provided through a series of firewalls.
There are over 140 LANs connected to the backbone and/or WAN. Aggregate
network traffic over the average business day is approximately 5 terabytes.
Traffic is typically not more than 50% of overall capacity. Network protocols
include IPX/SPX, Netbios, TCPIP, SNA, and X.25. Third party operating systems
used in production environments attached to the network include Netware, NT
Server, OS/2, Linux, and UNIX. There are approximately 630 server systems
supported as production devices, and approximately 1.6 terabytes of DASD.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation commenced in February 2000, in the
District Court of Dallas County, Texas, by Chase Manhattan Mortgage Corporation
("Chase") related to the Company's mortgage loan origination systems and
services. The complaint alleges breach of contract, breach of warranty,
misrepresentation, malpractice and mismanagement and seeks a declaratory
judgment and damages in excess of $20 million including amounts paid by Chase to
the Company, internal costs, consulting fees, opportunity costs, reputational
costs, attorneys fees and costs and punitive and exemplary damages. Chase is
also seeking an equitable accounting and injunctive relief related to the funds
paid under the agreement, preservation of the system, and support of the system.
The Company believes that the allegations are without merit and are subject to
various affirmative defenses and counterclaims and
will vigorously defend this matter. The Company is seeking to have the lawsuit
dismissed or stayed pending alternative dispute resolution proceedings as
required by the agreements between the parties.
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 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, tortious 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, attorney's 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 tortious 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 January 7, 2000, following a morning news release by the Company that
fourth quarter earnings would be below analyst estimates, the Company and three
of its officers were named as defendants in an purported class action complaint
filed on behalf of purchasers of the Company's stock during the period between
October 22, 1998 and January 6, 2000. Since this initial filing, additional
purported class actions have been filed, three in the United States District
Court for the District of South Carolina and two in the United States District
Court for the Southern District of New York (which are in the process of being
transferred to South Carolina), purportedly on behalf of purchasers of the
Company's stock during the period between October 22, 1998 and February 9 or 10,
2000.
These class action lawsuits allege violations of Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 based on, among other things, alleged
misleading statements, alleged failure to disclose material adverse information,
alleged false financial reporting, alleged failure to report trends, demands or
uncertainties, and alleged failure to implement and maintain adequate internal
controls. Each of the complaints seeks unspecified compensatory damages,
including interest, costs and attorney fees.
At a hearing held on March 20, 2000, the court granted plaintiffs' motion to
consolidate all six cases, appointed four members of the class as lead
plaintiffs and approved their selection of lead counsel, directed that the
complaints in all but the first-filed case be dismissed without prejudice, and
directed plaintiffs to file an amended consolidated complaint within 45 days.
Although the Company has not yet filed formal responses to these lawsuits,
the Company believes the claims are without merit and is vigorously pursuing a
full defense of these actions and allegations.
On March 10, 2000, 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, commenced a purported class action against the Company, its
Chairman and three members of the Administrative Committee of the Plan. The
action 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.
Although the Company's time to respond to this complaint has yet to occur, the
Company believes the claims are without merit and intends to mount a vigorous
defense to the allegations.
On March 30, 2000, the Company and Politic Acquisition Corporation ("Politic"),
an affiliate of Welsh, Carson, Anderson & Stowe, entered into a merger agreement
under which Politic will merge with the Company and between 75% and 93% of the
outstanding shares of Company common stock will be converted into the right to
receive $14 per share in cash. The exact percentage will be determined by an
election procedure under which the Company's stockholders can elect to retain
their shares or receive $14 per share in cash. If the stockholders elect to
retain more than 25% or less than 7% of their shares, stockholders will be
subject to proration to bring the amount of cash and stock within these limits.
The merger agreement is described in the Company's Current Report on Form 8-K
dated March 31, 2000. The merger is subject to the approval of the holders of
two-thirds of the outstanding shares of the Company at a special meeting of
stockholders which will be scheduled.
On March 31, 2000, three purported class action lawsuits were filed against the
Company and its directors in the Court of Common Pleas in Richland County, South
Carolina on behalf of all stockholders. The complaints allege that the
consideration to be paid in the Politic merger is unfair and grossly inadequate
because defendants failed to conduct a "market check" and because the Company
stock has consistently traded above $14 per share and its market price is only
temporarily depressed due to recent disappointing financial results. The
complaints also allege that defendants have a substantial conflict of interest,
to the extent they will continue their employment with the Company after the
merger. The complaints seek an injunction directing that defendants ensure that
no conflicts exist that would prevent defendants from exercising their fiduciary
obligation to maximize stockholder value, and an injunction preventing
consummation of the merger unless the Company implements a process, such as an
auction, to obtain the highest price for the Company, together with an award of
costs and attorneys' fees. The Company believes the claims are without merit
and will vigorously defend the 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.
While the resolution of any of the above matters could have a material adverse
effect on the results of operations in future periods, the Company does not
expect these matters to have a material adverse effect on its consolidated
financial position. The Company, however, is unable to predict the ultimate
outcome or the potential financial impact of these matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange, symbol
PMS. The Company has never paid or declared a cash dividend on its common
stock, nor currently has any intent to do so. The following table sets forth,
for the calendar periods indicated, the high and low market prices for the
Company's common stock, restated for the stock split that occurred in June 1998
(see Note 11 of Notes to Consolidated Financial Statements).
1999
High Low
------- ------
First Quarter. $54 15/16 $ 30 1/4
Second Quarter 41 3/4 26
Third Quarter. 36 26 5/8
Fourth Quarter 31 11/16 16 3/4
1998
High Low
------- ------
First Quarter. $40 11/32 $ 32
Second Quarter 43 1/2 36 3/8
Third Quarter. 48 3/8 36 3/4
Fourth Quarter 57 3/4 28 13/16
Title of Class
Common Stock, $.01 par value
The number of record holders of the Company's common stock was 1,177 as of April
14, 2000.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
RESULTS OF OPERATIONS
1999 1998 1997 1996 1995
-------- ---- ---- -------- --------
(In thousands, except per share data)
Revenues. . . . . . . . . . . . . . . . . $ 644,019 $607,458 $518,171 $423,310 $365,485
Operating (loss) income . . . . . . . . . (104,272) 87,432 79,193 69,565 16,285
Other (expenses) and income, net. . . . . (10,693) (2,136) (3,583) (2,677) (543)
(Loss) income from continuing operations
before income taxes . . . . . . . . . . (113,119) 86,355 76,799 66,888 15,742
Discontinued operations, net. . . . . . . - (465) 1,994 3,035 (4,959)
Net (loss) income . . . . . . . . . . . . $ (71,971) $ 53,271 $ 50,257 $ 45,997 $ 3,139
Basic (loss) earnings per share . . . . . $ (2.02) $ 1.46 $ 1.38 $ 1.24 $ 0.08
Diluted (loss) earnings per share . . . . $ (2.02) $ 1.36 $ 1.33 $ 1.22 $ 0.08
========== ========= ========= ========= =========
FINANCIAL CONDITION
Cash and equivalents and marketable
securities. . . . . . . . . . . . . . . $ 17,833 $ 26,013 $ 35,459 $ 24,355 $ 39,709
Current assets. . . . . . . . . . . . . . 211,999 217,123 185,809 160,342 165,593
Current liabilities . . . . . . . . . . . 75,995 98,935 86,213 112,636 94,461
Working capital . . . . . . . . . . . . . 136,004 118,188 99,596 47,706 71,132
Total assets. . . . . . . . . . . . . . . 706,288 718,698 618,406 581,386 532,736
Long-term debt (excludes current portion) 227,000 85,000 37,714 34,268 14,873
Total liabilities . . . . . . . . . . . . 384,103 285,688 207,910 218,134 150,064
Stockholders' equity. . . . . . . . . . . 321,561 432,484 410,496 363,252 382,672
The above should be read in conjunction with the Consolidated Financial
Statements, Notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations appearing in this Annual Report. Prior year
data has been reclassified to conform to current year presentation.
The Company considers special charges described below unusual events or unusual
transactions related to continuing business activities.
The results of operations for 1999 include approximately $153.6 million of
pre-tax special charges. These charges include approximately $118.4 million of
non-cash charges related to acceleration of amortization of software, and the
write-off of goodwill and other intangibles. The charges paid or to be paid in
cash include approximately $12.0 million related to disputes with customers,
approximately $12.9 million related to restructuring operations, approximately
$9.6 million related to the settlement of litigation, and other similar charges
of $0.7 million (see "Special Charges and Accounting Changes" under Management's
Discussion and Analysis).
The results of operations in 1998 include $13.3 million of special charges.
These pre-tax charges include $3.7 million related to the acquisition of TLG and
$9.6 million for the impairment of capitalized software development costs which
resulted from certain technology related issues and changes in the Company's
strategy (see "Special Charges and Accounting Changes" under Management's
Discussion and Analysis).
The results of operations in 1996 include a net special credit of $3.4 million.
This credit resulted from a pre-tax gain of $9.4 million related to the recovery
of previously incurred litigation costs and a pre-tax charge of $6.0 million
related to other litigation.
The results of operations in 1995 include special charges of $56.4 million
(after taxes $39.9 million, or $2.06 per share). These charges principally
related to the restructuring of the Company's data processing facilities and
information services business, litigation costs, acquisition-related charges,
impairment of certain intangible assets and software associated with acquired
businesses and the gain on the sale of the Company's health services business.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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:
Percent
Increase (Decrease)
-------------------
Percentage of Revenues 1999 1998
Year Ended December 31, vs vs
---------------------
1999 1998 1997 1998 1997
------ ------ ---- ------ ------
REVENUES:
Licensing . . . . . . . . . . . . . . . . . . 22.0% 22.0% 25.6% 6% 1%
Services. . . . . . . . . . . . . . . . . . . 78.0 78.0 74.4 6 23
------- ------ ------
100.0 100.0 100.0 6 17
OPERATING EXPENSES:
Cost of revenues:
Employee compensation and benefits . . . . . 48.0 44.1 41.8 15 24
Computer and communications expenses . . . . 7.9 6.3 6.2 33 19
Depreciation and amortization of property,
equipment and capitalized software costs 27.0 11.8 11.2 144 23
Other costs and expenses . . . . . . . . . . 8.6 3.9 5.3 132 (13)
Selling, general and administrative expenses. . 18.0 17.1 18.3 11 10
Amortization of goodwill and other intangibles. 3.2 1.8 1.9 94 8
Restructuring and other charges . . . . . . . . 3.5 - - - -
Acquisition related charges . . . . . . . . . . - 0.6 - - -
------- ------ ------
116.2 85.6 84.7 44 19
OPERATING (LOSS) INCOME . . . . . . . . . . . . (16.2) 14.4 15.3 (219) 10
Equity in earnings of unconsolidated affiliates 0.3 0.2 0.2 64 (2)
Minority interest . . . . . . . . . . . . . . . - - - (40) -
OTHER INCOME AND EXPENSES, NET. . . . . . . . . (1.7) (0.4) (0.7) 401 (40)
------- ------ ------
(LOSS) INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES . . . . . . . . . . . . . (17.6) 14.2 14.8 (231) 12
Income tax (benefit) expense. . . . . . . . . . (6.4) 5.4 5.5 (226) 14
------- ------ ------
(LOSS) INCOME FROM CONTINUING OPERATIONS. . . . (11.2) 8.8 9.3 (234) 11
Discontinued operations, net. . . . . . . . . . - (0.1) 0.4 (100) (123)
------- ------ ------
NET (LOSS) INCOME . . . . . . . . . . . . . . . (11.2)% 8.7% 9.7% (235)% 6%
======= ====== ======
REVENUES
The Company's revenues are generated principally by licensing standardized
insurance software systems and providing outsourcing and professional services
to the global insurance and related financial services industries. Licensing
revenues are provided for under the terms of nonexclusive and nontransferable
agreements, which generally have a noncancelable minimum term of six years and
provide for an initial license charge and a monthly license charge. Customers
wishing to acquire perpetual rights to use the Company's software enter into
additional agreements to acquire such rights.
LICENSING 1999 Change 1998 Change 1997
------- ------ ------- ------- -------
(Dollars in millions)
Initial charges. . . . $ 72.2 7% $ 67.7 (3)% $ 69.8
Monthly charges. . . . 69.7 6 66.1 5 62.9
------- ------- ------
$141.9 6% $133.8 1 % $132.7
======= ======= ======
Percentage of revenues 22.0% 22.0% 25.6%
Initial licensing
- ------------------
-
Initial license revenues for 1999 increased $4.5 million compared to 1998
with the following increases (decreases) by business segment: property and
casualty up 81% ($16.8 million) primarily from $11.8 million on new Claims
products and $3.0 million in PMSCiSolutions licensing; life and financial
solutions down 43% ($11.7 million) primarily due to a decline in Banking
Division licensing activity by comparison to 1998; and international down 3%
($0.6 million) primarily due to declining activity in Asia and Australia.
Initial license revenues for 1998 decreased $2.1 million compared to 1997 with
the following increases (decreases) by business segment: property and casualty
down 13% ($3.1 million) due to a decline in S3+ license activity; life and
financial solutions up 37% ($7.3 million) on strong Banking Division licensing
activity; and international down 24% ($6.3 million) due to lower licensing
activity in Central Europe combined with decreasing foreign currency values.
Initial license charges include right-to-use licenses of $14.3, $15.5 and $10.2
million for 1999, 1998 and 1997, respectively. 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. Initial license charges also include contract termination fees of
$1.0, $4.9 and $0.2 million for 1999, 1998, and 1997, respectively.
Additionally, 1999 initial license charges include $2.5 and $4.1 million from
the licensing of the recently acquired Legalgard and DORN products,
respectively. Initial license revenues in 1999 also include $2.9 million for a
COA license to the former owners of Legalgard, and $2.0 million for a license of
several of the Company's life and financial solutions products to the former
owners of FAS. Initial license revenues also include $3.3 million from the sale
of hardware remarketed by the Company in conjunction with licenses of its
software. In 1998, initial license charges include $4.9 million from licensing
of acquired TLG products and $2.2 million of license agreements with the
purchaser of the discontinued life information services segment. In 1997,
initial license charges include $1.8 million of initial license agreements with
the purchaser of the discontinued property and casualty information services
segment.
Because a significant portion of initial licensing revenues is recorded at the
time new systems are licensed, there can be significant fluctuations in revenue
from period to period. Set forth below is a comparison of initial license
revenues by segment for 1999, 1998 and 1997:
1999 Change 1998 Change 1997
------- ------ ------- ------- -----
(Dollars in millions)
Property and casualty. . . . $37.6 81 % $20.8 (13)% $23.9
Life and financial solutions 15.5 (43) 27.2 37 19.9
International. . . . . . . . 19.1 (3) 19.7 (24) 26.0
------ ------ -----
$72.2 7 % $67.7 (3)% $69.8
====== ====== =====
Percentage of total revenues 11.2% 11.1% 13.5%
Monthly licensing
- -----------------
Monthly license charges for 1999 increased $3.6 million compared to 1998,
with the following increases (decreases) by business segment: property and
casualty down 14% ($4.9 million) due to weak 1998 initial licensing and the
effect of right-to-use licenses; life and financial solutions up 37% ($5.4
million) on strong 1998 initial license activity; and international up 19% ($3.1
million) principally due to increased initial license activity in the United
Kingdom and the Asia/Pacific region during 1998.
Monthly license charges for 1998 increased $3.2 million compared to 1997.
The life and financial solutions segment's monthly license charges increased 25%
($2.9 million) due to strong initial licensing activity of life and financial
solutions products during 1997. The property and casualty and international
segments' monthly license charges remained relatively unchanged.
Set forth below is a comparison of monthly license revenue by segment for 1999,
1998 and 1997:
1999 Change 1998 Change 1997
------- ------ ------- ------ -----
(Dollars in millions)
Property and casualty. . . . $30.1 (14)% $35.0 (1)% $35.1
Life and financial solutions 20.0 37 14.6 25 11.7
International. . . . . . . . 19.6 19 16.5 3 16.1
------ ------ -----
$69.7 6% $66.1 5% $62.9
====== ====== =====
Percentage of total revenues 10.8% 10.9% 12.1%
SERVICES
The Company's services revenue consists primarily of Professional Services & ITO
and BPO. Services revenue is derived from professional support services, which
include implementation and integration assistance, consulting and education
services and outsourcing services.
Services 1999 Change 1998 Change 1997
- -------- ------ ------- ------ ------- ------
(Dollars in millions)
Professional Services & ITO $413.3 (2)% $419.9 27% $331.1
BPO . . . . . . . . . . . . 85.3 74 48.9 5 46.8
Other . . . . . . . . . . . 3.5 (27) 4.8 (37) 7.6
------- ------- ------
$502.1 6 % $473.6 23% $385.5
======= ======= ======
Percentage of revenues. . . 78.0% 78.0% 74.4%
- ------
Professional Services & ITO
- ------------------------------
Professional Services & ITO revenues for 1999 decreased $6.6 million
compared to 1998, with the following increases (decreases) by business segment:
property and casualty down 11% ($20.8 million) primarily due to the winding down
of Year 2000 preparations and a decrease in initial license activity in 1998;
life and financial solutions up 20% ($18.9 million) primarily due to the
acquisition of TLG in the third quarter of 1998 ($14.3million) and higher 1998
initial license activity; and international down 3% ($4.7 million) on weak 1998
initial licensing activity.
Professional Services & ITO revenues for 1998 increased $88.8 million compared
to 1997, with the following increases by business segment: property and
casualty up 30% ($42.2 million); life and financial solutions up 51% ($32.3
million); and international up 11% ($14.3 million). The increases are
principally due to increases in implementation services and in the processing
volumes of services provided to new and existing customers.
Set forth below is a comparison of Professional Services & ITO revenue by
segment for 1999, 1998 and 1997:
1999 Change 1998 Change 1997
------- ------ ------- ------ ------
(Dollars in millions)
Property and casualty. . . . $163.6 (11)% $184.4 30% $142.2
Life and financial solutions 115.2 20 96.3 51 64.0
International. . . . . . . . 134.5 (3) 139.2 11 124.9
------- ------- ------
$413.3 (2)% $419.9 27% $331.1
======= ======= ======
Percentage of total revenues 64.2% 69.1% 63.9%
BPO
- ---
BPO revenue for 1999 increased $36.4 million compared to 1998, with the
following increases by business segment: property and casualty up 23% ($8.5
million) with declines in governmental business more than off-set by growth in
commercial markets; life and financial solutions up 215% ($26.5 million)
primarily due to the acquisition of FAS ($10.7 million) and internal growth; and
international with $1.4 million.
BPO revenue for 1998 increased $2.1 million compared to 1997, with the
following increases (decreases) by business segment: property and casualty down
8% ($3.0 million) primarily due to a loss of governmental business and life and
financial solutions up 71% ($5.1 million) principally due to an increased
presence in the traditional BPO market.
Set forth below is a comparison of BPO revenue by segment for 1999, 1998
and 1997:
1999 Change 1998 Change 1997
------- ------ ------ ------ ------
(Dollars in millions)
Property and casualty. . . . $45.1 23% $36.6 (8)% $39.6
Life and financial solutions 38.8 215 12.3 71 7.2
International. . . . . . . . 1.4 - - - -
------ ------ -----
$85.3 74% $48.9 5% $46.8
====== ====== =====
Percentage of total revenues 13.2% 8.0% 9.0%
- ------
OPERATING EXPENSES
COST OF REVENUES
Employee compensation and benefits:
- -------------------------------------
Employee compensation and benefits for 1999 increased 15% compared to 1998.
The Company's acquisitions in 1999 and late 1998 (see Note 2 of Notes to
Consolidated Financial Statements) accounted for approximately one half ($19.2
million) of the increase with the remainder attributable principally to higher
salaries and related costs associated with the growth in professional services
and BPO staffing. These increases are somewhat offset by the transfer of
certain employee costs to computer and communication expenses as a result of the
Company's data center outsourcing agreement with Lockheed Martin Corporation
("Lockheed Martin"). Had these employee costs not been transferred, 1999
employee compensation and benefits would have increased 16% by comparison to
1998. Compensation and benefits increased 7% ($5.8 million) internationally and
19% ($35.6 million) domestically.
Employee compensation and benefits for 1998 increased 24% compared to 1997. The
net increase results principally from higher salaries and related costs
associated with the growth in professional services staffing being somewhat
offset by the transfer of certain employee costs to computer and communication
expenses as a result of the Company's data center outsourcing agreement with
Lockheed Martin. Had these employee costs not been transferred, 1998 employee
compensation and benefits would have increased 25% by comparison to 1997.
Compensation and benefits increased 23% ($14.2 million) internationally and 24%
($37.0 million) domestically.
Computer and communication expenses:
- --------------------------------------
Computer and communications expenses for 1999 increased 33% compared to
1998, due primarily to the data center outsourcing agreement with Lockheed
Martin that the Company entered into at the beginning of the third quarter of
1998 and increased data center operating software license fees. As a result of
the data center outsourcing agreement, certain costs previously included in
employee compensation and benefits are now included in computer and
communications expense. Had these employee costs not been transferred, 1999
computer and communications expenses would have increased 27% by comparison to
1998.
Computer and communications expenses for 1998 increased 19% compared to 1997
principally due to the data center outsourcing agreement with Lockheed Martin.
Had the related employee costs not been transferred, 1998 computer and
communications expenses would have increased 8% by comparison to 1997. Cost
savings from the data center outsourcing agreement were offset by increased
communications volumes, increased network and PC related expenses and increased
license fees for operational data center software.
The following chart reflects Employee compensation and benefits and Computer and
communication costs during 1999, 1998 and 1997 without the effect of moving
certain salary costs related to the Lockheed Martin outsourcing contract.
1999 Change 1998 Change 1997
------ ------ ------ ----- -----
(Dollars in millions)
Employee compensation and benefits $316.1 16% $271.8 25% $216.8
Computer and communication expense 44.0 27 34.7 8 32.3
- ------
Depreciation and amortization of property, equipment and capitalized software
- --------------------------------------------------------------------------------
costs:
- -----
Depreciation and amortization of property, equipment and capitalized
software costs for 1999 increased 144% compared to 1998 principally due to the
write-off or write-down of certain software described below under "Special
Charges and Accounting Changes." Excluding these charges, depreciation and
amortization decreased 1% due primarily to the benefit of the special charges
largely offset by increased software amortization related to product releases
during the last twelve months and increased depreciation of property and
equipment primarily related to new headquarters facilities in Blythewood and the
United Kingdom. These increases were partially offset by lower software
amortization as a result of software write-offs and write-downs. As a
percentage of revenue, depreciation and amortization expense, excluding special
charges, remained the same at 10% of revenues in both 1999 and 1998.
Depreciation and amortization of property, equipment and capitalized software
costs for 1998 increased 23% compared to 1997 principally due to impairment
charges of capitalized software development costs described below under "Special
Charges and Accounting Changes." Excluding these charges, depreciation and
amortization increased 7% principally due to higher amortization expense
resulting from various releases of the Company's internally developed software
products. As a percentage of revenue, depreciation and amortization expense
before special charges remained relatively unchanged from 1998 to 1997.
Other costs and expenses:
- ---------------------------
Other costs and expenses for 1999 increased 132% compared with 1998. The
acquisitions in 1999 and late 1998 (see Note 2 of Notes to Consolidated
Financial Statements) contributed to an $11.3 million increase in other costs
and expenses. The remainder is primarily attributable to decreased
capitalization of software development costs and rent on new facilities. The
Company reserved for uncollectible accounts of $12.4 million associated with its
life and financial solutions business, primarily related to $8.3 million of
accounts receivable from the Banking Division, and one property and casualty
customer (see Note 15 of Notes to Consolidated Financial Statements).
Other costs and expenses for 1998 decreased 13% compared to 1997
principally due to lower consultant, contract loss and bad debt expense,
partially offset by increased facility costs and decreased amounts of
capitalized software development costs.
Selling, General and Administrative:
- --------------------------------------
Selling, general and administrative expenses for 1999 increased 11%
compared to 1998. As a percentage of revenue, these expenses increased to 18%
from 17% in 1998.
Selling, general and administrative expenses for 1998 increased 10% compared to
1997. As a percentage of revenue, these expenses declined to 17% from 18% in
1997.
Amortization of Goodwill and Other Intangibles:
- ---------------------------------------------------
Amortization of goodwill and other intangibles for 1999 increased 94% compared
to 1998, principally due to the impairment charges recorded in the third quarter
that are described below under "Special Charges and Accounting Changes."
Amortization related to the acquisition of TLG in 1998 and Legalgard, DORN and
FAS in 1999 also contributed to the increase.
Amortization of goodwill and other intangibles for 1998 increased 8% compared to
1997, principally due to the amortization of costs associated with the
acquisition of TLG and the Lockheed Martin outsourcing arrangement.
- ------
Special Charges and Accounting Changes:
- ------------------------------------------
For the purposes of this analysis, the Company considers special charges to
be unusual events or unusual transactions related to continuing business
activities.
1999 Fourth Quarter
In the fourth quarter of 1999, the Company recorded special charges of
approximately $26.6 million primarily related to its Banking Division. During
this quarter and continuing into the first quarter of 2000, rising interest
rates caused significant declines in mortgage loan originations and reduced
profits for mortgage loan originators. This in turn led many existing and
prospective customers of the Company's Banking Division to re-evaluate their
loan origination system projects and requirements. Consequently, the Company
established reserves of approximately $8.3 million for accounts receivable and
accrued revenue as a result of disputes with several significant Banking
Division customers. The Company is in continuing dialogue with these customers
and is in various stages of negotiations or resolution concerning these
disputes. Furthermore, given the Company's estimate that interest rates will
not decrease in the near term, the forecast of new licenses of the LoanXchange
product was revised resulting in a $16.3 million write-off of Banking Division
software. In addition, in the 1999 fourth quarter, the Company decreased the
carrying value of several smaller software products by approximately $1.8
million (see Note 6 of Notes to Consolidated Financial Statements relative to
these last two items).
On December 3, 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101"). The Company identified approximately $3.2 million of revenue
recognized previously in 1999 requiring adjustment due to SAB 101 (see "New
Accounting Standards and Guidance," below).
As a result of 1999 fourth quarter changes in estimates related to two
long-term services agreements accounted for under the percentage of completion
method of accounting, the Company recorded a cumulative catch-up adjustment in
the fourth quarter of 1999 of $8.4 million. The adjustment has been recorded as
a reduction in Services revenues.
Additionally, during the 1999 fourth quarter, the Company recorded
restructuring charges of approximately $0.3 million related to payments to
approximately 19 staff involuntarily terminated primarily in the property and
casualty segment.
1999 Third Quarter
During 1999 third quarter, the Company commenced assessments of all major
aspects of its business based upon the increasing rate of change in technology
in its marketplace including among other things the Internet and the rapid
adoption of eCommerce. In addition, the Company also initiated a number of
international and domestic restructuring and cost reduction initiatives. This
assessment included various international and domestic intangibles and
capitalized software costs.
As a result of that assessment, the 1999 third quarter results include
approximately $100.4 million of non-cash charges taken in the third quarter
related to the write-off or write-down of software and acquisition intangibles.
Approximately $94.3 million of that amount is included in Depreciation and
amortization of property, equipment and capitalized software costs (see Note 6
of Notes to Consolidated Financial Statements), and approximately $6.1 million
is included in Amortization of goodwill and other intangibles (see Note 5 of
Notes to Consolidated Financial Statements).
Additionally, the 1999 third quarter results include restructuring and other
charges of approximately $12.6 million. These charges, paid or to be paid in
cash, result from initiatives taken by the Company in 1999 to eliminate costs
through worldwide reductions in force and space requirements. Approximately
$7.3 million represents amounts payable to approximately 83 staff who were
involuntarily terminated. Approximately $5.3 million relates
to minimum lease obligations remaining on vacated offices, reduced by estimated
sublease income. The charges related primarily to actions taken in the property
and casualty and international business groups.
On September 23, 1999, the Company and Liberty Life Insurance Company and
certain of its affiliates ("Liberty") entered into a confidential settlement
agreement of previously disclosed litigation. As a part of the settlement, both
the Company and Liberty agreed to release the other from all claims asserted and
the lawsuit was dismissed. As a result of the settlement, the Company recorded
a cash charge of approximately $9.6 million.
1998
The results of operations in 1998 include $13.3 million of special charges.
These pre-tax charges include $3.7 million related to the acquisition of TLG and
$9.6 million for the impairment of capitalized software development costs which
resulted from certain technology related issues and changes in the Company's
strategy (see Note 6 of Notes to Consolidated Financial Statements).
Operating Income (Loss):
- -------------------------
1999 produced an operating loss of $104.3 million compared with the 1998
operating income of $87.4 million. The 1999 operating loss results primarily
from the write-off or write-down of certain software, intangibles related to
business acquisitions and restructuring, and other charges described above in
"Special Charges and Accounting Changes." Before these charges, operating
income for 1999 decreased 38% compared with 1998. Also before these charges,
decreases in segment operating income were: property and casualty decreased 17%,
life and financial solutions decreased 19% and international decreased 64% (see
discussion of "Revenues" and "Operating Expenses" above).
1998 operating income increased 10% compared to 1997. Increases in segment
operating income were: property and casualty - 5%, life and financial solutions
- - 74% and international - 15%. The increase in 1998 operating income is
primarily related to increases in professional services and outsourcing revenues
while operating costs increased at a slower rate than the related revenue.
Excluding special charges and credits, operating income for 1998 was $100.8
million compared to $79.2 million for 1997.
Operating income, as a percentage of total revenues, excluding the effects of
the special charges described above, was 10% for 1999, 17% for 1998 and 15% for
1997.
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 has led the Company to consider new business models
that place less emphasis on initial license revenue in favor of recurring
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 speed
of this transition will be dependent upon the impact on revenues and the
resulting impact on the Company's cash flows and debt levels.
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.
Set forth below is a comparison of initial license revenues by quarter
expressed as a percentage of annual initial license revenues and total revenues
for each of the years presented:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- ------
(Dollars in Millions)
1999 initial license revenues. . . . $ 17.5 $26.8 $19.2 $ 8.7 $ 72.2
% of annual initial license revenues 27.3% 41.5% 26.6% 12.0% 100.0%
% of total revenues. . . . . . . . . 11.0% 15.4% 11.4% 6.1% 11.2%
1998 initial license revenues. . . . $ 12.6 $13.0 $14.7 $27.4 $ 67.7
% of annual initial license revenues 18.6 % 19.2% 21.7% 40.5% 100.0%
% of total revenues. . . . . . . . . 9.0% 9.0% 9.7% 16.0% 11.1%
1997 initial license revenues. . . . $ 11.3 $16.6 $16.9 $25.0 $ 69.8
% of annual initial license revenues 16.2% 23.8% 24.2% 35.8% 100.0%
% of total revenues. . . . . . . . . 9.8% 13.4% 12.8% 17.0% 13.5%
Other Income and Expenses:
- ----------------------------
Investment income decreased in 1999 due to lower investable funds compared
to 1998. Interest expense increased 224% for 1999 compared to 1998, principally
due to higher levels of borrowed funds under the Company's credit agreements.
Investment income for 1998 was relatively unchanged compared to 1997. Interest
expense decreased 28% for 1998 compared to 1997, principally due to lower levels
of borrowed funds under the Company's credit agreements and the capitalization
of interest on construction in progress.
Income Taxes:
- ------------- ---
The effective income tax rate (income taxes expressed as a percentage of
pre-tax income or loss) on continuing operations including special charges and
accounting changes was 36.4%, 39.7% and 37.4% for the years ended December 31,
1999, 1998, and 1997, respectively. The effective income tax rate on continuing
operations before special charges and accounting changes was 37.2%, 37.8%, and
37.2% for the years ended December 31, 1999, 1998, and 1997, respectively.
Discontinued Operations, Net:
- ------------------------------
There were no discontinued operations for 1999. Loss from discontinued
operations increased in 1998 compared to 1997, principally due to (i) an
additional loss of $1.0 million, net of tax, recognized during 1998 related to
the write down of capitalized software and receivables of the property and
casualty information services segment; (ii) partial year operating results in
1998 compared to full year operating results in 1997 for the life information
services segment; and (iii) no operating results in 1998 compared to eight
months operating results in 1997 for the property and casualty information
services segment.
For additional information on the discontinued operations, see Note 12 of
Notes to Consolidated Financial Statements.
NEW ACCOUNTING STANDARDS AND GUIDANCE
In June 1998, Statement of Financial Accounting Standard No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133") was issued,
effective for fiscal years beginning after June 15, 1999, with earlier adoption
encouraged. SFAS 133 requires companies to record derivative instruments on the
balance sheet as assets and liabilities, measured at fair value. Gain or losses
resulting from changes in the values of those derivatives are accounted for
depending on the use of the derivative. The Company does not enter into
derivative instruments except occasionally to hedge the foreign currency
exchange and interest rate risk of specific projected transactions. The Company
was not holding any derivative instruments at December 31, 1999 and 1998.
On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements ("SAB 101"), which among other guidance,
clarifies certain conditions to be met in order to recognize revenue. The
Company has identified approximately $3.2 million of revenue recognized
previously in 1999 requiring adjustment due to SAB 101. These adjustments arose
from fees of $3.0 million received on two joint marketing arrangements, and the
existence of acceptance terms in a single DORN license agreement totaling $0.2
million. In addition, $1.0 million of DORN license revenue was deferred from
the 1999 fourth quarter. As required by SAB 101, the Company has treated these
adjustments as a change in accounting principle in accordance with Accounting
Principles Board Opinion No. 20, Accounting Changes, and therefore has deferred
this revenue in 1999.
LIQUIDITY AND CAPITAL RESOURCES
December 31,
1999 1998
------- -------
(In Millions)
Cash and equivalents and marketable securities $ 17.8 $ 26.0
Current assets . . . . . . . . . . . . . . . . 212.0 217.1
Current liabilities. . . . . . . . . . . . . . 76.0 98.9
Working capital. . . . . . . . . . . . . . . . 136.0 118.2
Current portion of long-term debt. . . . . . . 4.0 15.8
Long-term debt . . . . . . . . . . . . . . . . 227.0 85.0
Cash provided by operations. . . . . . . . . . $ 80.0 $ 99.8
Cash used by investing activities. . . . . . . (180.6) (138.2)
Cash provided by financing activities. . . . . 92.3 32.2
The Company's total debt, net of cash and marketable securities, at
December 31, 1999 was $213.0 million, a significant increase over the comparable
amount ($75.0 million) at December 31, 1998. 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. However, during 1999, the Company principally used its debt capacity to
fund several strategic business acquisitions and investments aggregating $73.0
million and, to a lesser degree, repurchase its outstanding common stock ($33.0
million). Additionally, during 1999 the Company also invested $103.0 million in
capitalized internal software development and property and equipment.
As of December 31, 1999, the Company had the following credit facilities: a
$200.0 million line of credit expiring in 2002 that had $155.0 million
outstanding; a $70.0 million term loan that matures on July 15, 2000; and a $5.0
million uncommitted line of credit that had $4.0 million outstanding. Because
of the large net loss in the fourth quarter, the Company was in violation of one
of the financial covenants of both the line of credit and the term loan.
Amendments of the related agreements were executed in February and March 2000
that return the Company to compliance with these covenants. Additionally, the
amendments include an extension of the term loan maturity to January 31, 2001
and, among other things, an increase in the interest rate payable on the term
loan and line of credit, a security agreement covering the Company's assets and
a restriction on the Company's ability to make acquisitions and certain similar
investments and repurchases of the Company's common stock. Total funds
available under the line of credit will be reduced to $180.0 million until April
1, 2001 at which time it will decrease to $125.0 million; the maturity has also
been shortened to July 2001.
Based upon an analysis of the preliminary results for the quarter ended March
31, 2000, the Company believes its final results for the quarter would result in
a violation of the Leverage Ratio financial covenant of both the credit and term
loan agreements as amended. However, the Company has entered into an amendment
waiving this covenant through December 30, 2000. In connection with this
amendment, the Company agreed to establish a new covenant applicable during the
waiver period based upon quarterly consolidated adjusted cash flows less capital
expenditures. The Leverage Ratio financial covenant required that the ratio of
debt to consolidated adjusted cash flow be less than 5.5x through September 29,
2000, less than 3.5x from September 30, 2000 to December 31, 2000 and less than
2.5x thereafter. The amendment requires that quarterly consolidated adjusted
cash flow less capital expenditures at least equal $(2.0) million for the
quarter ended March 31, 2000, $15.0 million for the quarter ended June 30, 2000
and $30.0 million for the quarter ended September 30, 2000.
Future credit availability under the Company's amended loan 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, prior to making an agreement with Politic,
concluded that it must restructure its capital base in order to reduce debt and
take advantage of various growth opportunities. Accordingly, the Board of
Directors has authorized the Company's management to explore various
alternatives to achieve efficiencies and obtain equity or other financing.
Significant expenditures planned for 2000, excluding new product development are
as follows: acquisition of data processing and communications equipment, support
software, buildings, building improvements and office furniture, fixtures and
equipment and costs related to the continued enhancement of existing software
products.
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.
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 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.
YEAR 2000
The Company's products are designed to be used with and require the use of
third-party products, such as operating systems and compilers. Also, customers
often modify the Company's products to suit their unique requirements. If these
third parties experience or had experienced Year 2000 failures of their
products, or if customers experience or had experienced system failures as a
result of their modifications, the Company could become involved in disputes or
litigation related to the cause of such system failures.
To date, the Company has not experienced any noteworthy system or
application failures during the Year 2000 transition periods. Although some
incidents were identified, a large percentage of the issues related to date and
time stamps that contained erroneous values in the year field presented on
reports or on-line screens. Of the few remaining issues not fitting this
description, resolutions were either implemented in an expedient and efficient
manner or procedures designed to mitigate customer impacts were adopted.
YEAR 2000 COSTS
Since 1993, the Company estimates that it has incurred approximately $22.0
million in costs to address Year 2000 remediation issues. Based on the
Company's experience, it is not anticipated that additional expenses to address
Year 2000 concerns will be incurred. These Company costs were funded by
operations.
EURO CONVERSION
On January 1, 1999, certain member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and the euro and agreed to adopt the euro as their common legal currency on that
date. It is also possible that some of the non-participating countries may also
choose to convert to the euro at a later date. During the January 1, 1999 to
December 31, 2001 transition period participating countries may conduct
transactions in either their legacy currency or the euro. On January 1, 2002,
new euro-denominated bills and coins will be issued, and by July 1, 2002, all
legacy currency bills and coins will be withdrawn, finalizing the conversion to
the euro.
The needs of each licensee of the Company's products domiciled or doing business
in the participating countries may vary with regard to converting to the euro
depending on how and when they choose to convert. The Company has developed
strategies to modify its products licensed in the participating countries to
convert to the euro. These modifications may be made available to licensees for
a fee. Implementation of the modifications is the responsibility of each
licensee.
The Company's subsidiaries are incorporated in four of the participating
countries: Germany, Austria, the Netherlands and Ireland. The Company has
implemented new financial accounting systems that will enable it to convert the
affected operations to the euro in a timely and effective manner.
Based upon the Company's experience to date, it is not anticipated that the euro
conversion will have a material impact on the Company's consolidated financial
statements.
SEASONALITY AND INFLATION
The Company's operations have not proven to be significantly seasonal,
though as with many companies in the software business, the fourth quarter
historically tends to be the strongest quarter annually. Quarterly revenues and
net income can be expected to vary at times. This is attributable principally
to the timing of customers entering into license agreements with the Company.
The Company is unable to control the timing of these decisions.
Although the Company cannot accurately determine the amounts attributable
thereto, the Company has been affected by inflation through increased costs of
employee compensation and other operating expenses. To the extent permitted by
the marketplace for the Company's products and services, the Company attempts to
recover increases in costs by periodically increasing prices. Additionally,
most of the Company's license agreements and long-term services agreements
provide for annual increases in charges.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 1999, the Company held one foreign currency forward
contract with a notational value of $1.9 million as a cash flow hedge that the
Company settled in January 2000 for $1.9 million. Apart from this exchange
contract, the Company held no derivatives or similar financial instruments
bearing market risk related to interest rates, foreign currency, equities or
commodities. From time to time, the Company enters into forward foreign
currency exchange contracts to hedge specific anticipated transactions in
currencies other than the US dollar. Approximately 21% of the Company's assets
are invested in currencies other than the US dollar. There are no material
financial assets held in currencies outside of the functional currencies of
these subsidiaries.
The Company has variable rate debt explained in Note 7 of Notes to Consolidated
Financial Statements.
____________________________________________________
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: Statements in this annual 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 in Note 14 of Notes to Consolidated
Financial Statements and elsewhere herein 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Supplementary Data
Page
REPORT OF INDEPENDENT ACCOUNTANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES:
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 31
Consolidated Balance Sheets as of December 31, 1999 and 1998 . . . . . . . . . . . . . . . 32
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income
for the years ended December 31, 1999, 1998 and 1997. . . . . . . . . . . . . . . . . 33
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 34
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 36
QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . 58
SUPPLEMENTAL SCHEDULES:
Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . . . . . . . 60
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
<FN>
Supplemental schedules other than those listed above are omitted because of the absence of
conditions under which they are required or because the required information is included in the
Consolidated Financial Statements or in the Notes thereto.
------
REPORT OF INDEPENDENT ACCOUNTANTS
----------------------------------
To the Board of Directors
Policy Management Systems Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and changes in stockholders'
equity and comprehensive income present fairly, in all material respects, the
financial position of Policy Management Systems Corporation and its subsidiaries
at December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Atlanta, Georgia
March 30, 2000
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- --------
(In thousands, except per share data)
REVENUES:
Licensing. . . . . . . . . . . . . . . . . . . . . . . . $ 141,939 $133,814 $132,705
Services . . . . . . . . . . . . . . . . . . . . . . . . 502,080 473,644 385,466
---------- --------- ---------
644,019 607,458 518,171
---------- --------- ---------
OPERATING EXPENSES:
Cost of revenues:
Employee compensation and benefits . . . . . . . . . . 309,089 268,096 216,779
Computer and communications expenses . . . . . . . . . 51,021 38,451 32,333
Depreciation and amortization of property,
equipment and capitalized software costs . . . . . . 174,146 71,376 57,959
Other costs and expenses . . . . . . . . . . . . . . . 55,375 23,897 27,459
Selling, general and administrative expenses . . . . . . 115,714 103,909 94,649
Amortization of goodwill and other intangibles . . . . . 20,468 10,565 9,799
Restructuring and other charges. . . . . . . . . . . . . 22,478 - -
Acquisition related charges. . . . . . . . . . . . . . . - 3,732 -
---------- --------- ---------
748,291 520,026 438,978
---------- --------- ---------
OPERATING (LOSS) INCOME. . . . . . . . . . . . . . . . . . (104,272) 87,432 79,193
Equity in earnings of unconsolidated affiliates. . . . . . 1,908 1,163 1,189
Minority interest. . . . . . . . . . . . . . . . . . . . . (62) (104) -
OTHER INCOME AND EXPENSES:
Investment income. . . . . . . . . . . . . . . . . . . . 1,313 1,569 1,527
Interest expense and other charges . . . . . . . . . . . (12,006) (3,705) (5,110)
---------- --------- ---------
(10,693) (2,136) (3,583)
---------- --------- ---------
(LOSS) INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . . . (113,119) 86,355 76,799
Income tax (benefit) expense . . . . . . . . . . . . . . . (41,148) 32,619 28,536
---------- --------- ---------
(LOSS) INCOME FROM CONTINUING OPERATIONS . . . . . . . . . (71,971) 53,736 48,263
DISCONTINUED OPERATIONS:
Income from operations of discontinued
operations less applicable income taxes
of $252 and $1,535, respectively . . . . . . . . . . . - 389 2,058
Loss on disposal of discontinued operations, less
applicable income taxes (benefit) of $2,272 and ($38),
respectively. . . . . . . . . . . . . . . . . . . . . - (854) (64)
---------- --------- ---------
- (465) 1,994
---------- --------- ---------
NET (LOSS) INCOME. . . . . . . . . . . . . . . . . . . . . $ (71,971) $ 53,271 $ 50,257
========== ========= =========
BASIC EARNINGS PER SHARE:
(Loss ) income from continuing operations. . . . . . . . $ (2.02) $ 1.47 $ 1.32
(Loss) income from discontinued operations . . . . . . . - (0.01) 0.06
---------- --------- ---------
$ (2.02) $ 1.46 $ 1.38
========== ========= =========
DILUTED EARNINGS PER SHARE:
(Loss) income from continuing operations . . . . . . . . $ (2.02) $ 1.37 $ 1.28
(Loss) income from discontinued operations . . . . . . . - (0.01) 0.05
---------- --------- ---------
$ (2.02) $ 1.36 $ 1.33
========== ========= =========
WEIGHTED AVERAGE COMMON SHARES . . . . . . . . . . . . . . 35,549 36,441 36,468
========== ========= =========
WEIGHTED AVERAGE COMMON SHARES ASSUMING DILUTION . . . . . 35,549 39,289 37,666
========== ========= =========
<FN>
See accompanying notes.
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------
1999 1998
-------- ---------
(In thousands, except share data)
ASSETS
Current assets:
Cash and equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,744 $ 26,013
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 -
Receivables, net of allowance for uncollectible amounts of $13,000 ($2,051 at 1998) 99,669 123,427
Accrued revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,393 26,557
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,979 9,336
Income tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,728 -
Other receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,788 11,279
Prepaids. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,050 8,645
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,559 11,866
--------- ---------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211,999 217,123
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142,867 135,538
Accrued revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,130 7,844
Income tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,041 4,041
Goodwill and other intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . 111,024 81,401
Capitalized software costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 155,896 220,908
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,850 24,787
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,332 9,661
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,149 17,395
--------- ---------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $706,288 $718,698
========= =========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . $ 41,236 $ 57,129
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 15,812
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,616 9,202
Unearned revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,290 15,804
Accrued restructuring and other charges . . . . . . . . . . . . . . . . . . . . . . 3,630 806
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,223 182
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,995 98,935
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227,000 85,000
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,514 98,233
Accrued restructuring and other charges . . . . . . . . . . . . . . . . . . . . . . . 2,659 767
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,935 2,753
--------- ---------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 384,103 285,688
--------- ---------
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 624 526
Commitments and contingencies (Note 8)
STOCKHOLDERS' EQUITY
Special stock, $.01 par value, 5,000,000 shares authorized. . . . . . . . . . . . . . - -
Common stock, $.01 par value, 75,000,000 shares authorized,
35,585,078 shares issued and outstanding (36,357,139 at 1998) . . . . . . . . . . . 356 364
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,695 82,396
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287,483 359,454
Accumulated other comprehensive income. . . . . . . . . . . . . . . . . . . . . . . . (12,972) (9,730)
Stock employee compensation trust . . . . . . . . . . . . . . . . . . . . . . . . . . (10,001) -
--------- ---------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 321,561 432,484
--------- ---------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . . . . $706,288 $718,698
========= =========
<FN>
See accompanying notes.
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Accumulated
Additional Other
Common Paid-In Retained Comprehensive Unearned
Stock Capital Earnings Income Compensation Total
-------- ------- --------- -------- --------- --------
(Dollars in thousands)
BALANCE, DECEMBER 31, 1996 . . . . $ 182 $106,104 $256,110 $ 856 - $363,252
Comprehensive income
Net income . . . . . . . . . . . - - 50,257 - - 50,257
Other comprehensive income,
net of tax
Foreign currency
translation adjustments. . . - - - (9,020) - (9,020)
Unrealized gain on
marketable securities. . . . - - - 20 - 20
---------
Total comprehensive income . . . . 41,257
---------
Stock options exercised
(240,018 shares) . . . . . . . . 3 11,018 - - - 11,021
Repurchase of 79,900 shares
of common stock. . . . . . . . . ( 2) (5,032) - - - (5,034)
--------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 . . . . 183 112,090 306,367 (8,144) - 410,496
Comprehensive income
Net income . . . . . . . . . . . - - 53,271 - - 53,271
Other comprehensive income,
net of tax
Foreign currency
translation adjustments. . . - - - (1,578) - (1,578)
Unrealized gain on
marketable securities. . . . - - - (8) - (8)
---------
Total comprehensive income . . . . 51,685
---------
Stock dividend (18,426,691 shares) 184 - (184) - - -
Stock options exercised
(1,734,544 shares) . . . . . . . 18 61,623 - - - 61,641
Repurchase of 2,143,400 shares
of common stock. . . . . . . . . (21) (91,317) - - - (91,338)
--------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1998 . . . . 364 82,396 359,454 (9,730) - 432,484
Comprehensive income
Net loss . . . . . . . . . . . . - - (71,971) - - (71,971)
Other comprehensive income,
net of tax
Foreign currency
translation adjustments. . . - - - (3,242) - (3,242)
---------
Total comprehensive income . . . . (75,213)
---------
Purchase of shares for SECT. . . . - - - - (10,094) (10,094)
Restricted stock vested. . . . . . - (3) - - 19 16
Restricted stock forfeited . . . . - (74) - - 74 -
Stock options exercised
(243,452 shares) . . . . . . . . 2 7,411 - - - 7,413
Repurchase of 1,015,513 shares
of common stock. . . . . . . . . (10) (33,035) - - - (33,045)
--------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1999 . . . . $ 356 $ 56,695 287,483 $(12,972) $(10,001) $321,561
========= ========= ========= ========= ========= =========
<FN>
See accompanying notes.
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
OPERATING ACTIVITIES
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . $ (71,971) $ 53,271 $ 50,257
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 201,562 87,979 72,351
Deferred income taxes . . . . . . . . . . . . . . . . . . . (46,481) 5,338 13,365
Provision for uncollectible accounts. . . . . . . . . . . . 12,350 90 2,951
Gain on disposal of discontinued operations . . . . . . . . - (1,986) -
Acquisition related charges . . . . . . . . . . . . . . . . - 3,732 -
Changes in assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . 18,612 (37,775) (5,594)
Accrued revenues. . . . . . . . . . . . . . . . . . . . . . (17,980) 7,739 (8,438)
Other receivable. . . . . . . . . . . . . . . . . . . . . . 11,279 - -
Accounts payable and accrued expenses . . . . . . . . . . . (18,023) (3,540) (4,422)
Accrued restructuring and other charges . . . . . . . . . . 5,030 62 (2,307)
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . (14,599) 1,903 876
Unearned revenues . . . . . . . . . . . . . . . . . . . . . 1,967 (3,825) 8,966
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . (1,708) (13,195) 224
---------- ---------- ----------
Cash provided by operations. . . . . . . . . . . . . . 80,038 99,793 128,229
---------- ---------- ----------
INVESTING ACTIVITIES
Proceeds from sales/maturities of available-for-sale securities 2,108 3,257 250
Proceeds from maturities of held-to-maturity securities . . . . - 2,969 -
Proceeds from sale of business segment. . . . . . . . . . . . . - 23,826 2,900
Acquisition of property and equipment . . . . . . . . . . . . . (35,937) (61,699) (31,761)
Capitalized internal software development costs . . . . . . . . (67,106) (59,642) (62,508)
Business acquisitions and investments . . . . . . . . . . . . . (72,589) (36,898) (4,850)
Proceeds from disposal of property and equipment. . . . . . . . 1,316 1,031 806
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,441) (11,013) (2,410)
---------- ---------- ----------
Cash used by investing activities . . . . . . . . . . . . . . . . . (180,649) (138,169) (97,573)
---------- ---------- ----------
FINANCING ACTIVITIES
Payments on long-term debt. . . . . . . . . . . . . . . . . . . (349,012) (67,593) (181,219)
Proceeds from borrowing under credit facilities . . . . . . . . 477,200 129,500 154,634
Purchase of stock for Stock Employee Compensation Trust . . . . (10,094) - -
Issuance of common stock under stock option plans . . . . . . . 7,293 61,641 11,021
Repurchase of outstanding common stock. . . . . . . . . . . . . (33,045) (91,338) (5,034)
---------- ---------- ----------
Cash provided (used) by financing activities . . . . . 92,342 32,210 (20,598)
---------- ---------- ----------
Net decrease in cash and equivalents. . . . . . . . . . . . . . . . (8,269) (6,166) 10,058
Cash and equivalents at beginning of period . . . . . . . . . . . . 26,013 32,179 22,121
---------- ---------- ----------
Cash and equivalents at end of period . . . . . . . . . . . . . . . $ 17,744 $ 26,013 $ 32,179
========== ========== ==========
SUPPLEMENTAL INFORMATION
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,275 $ 2,174 $ 3,328
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . 16,568 14,056 12,229
<FN>
Non-cash transactions:
During 1999, the Company transferred $7.8 million ($15.0 million gross cost net of amortization) of
contract acquisition costs at net book value to other receivables which was paid in January 2000.
During 1998, the Company recorded a liability and corresponding asset related to the deferral of $2.5
million of compensation expense payable in the form of restricted stock, vesting over five years.
During 1998, the Company transferred $11.3 million of property, plant and equipment at net book value
to Lockheed Martin Corporation which was paid in January 1999.
See accompanying notes.
POLICY MANAGEMENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements are prepared on the basis of
generally accepted accounting principles and include the accounts of the Company
and its majority owned subsidiaries (collectively, the "Company"). All material
intercompany balances and transactions have been eliminated. The equity method
of accounting is used when the Company does not have effective control and has a
20% to 50% interest in other companies. Under the equity method, original
investments are recorded at cost and adjusted by the Company's share of
undistributed earnings or losses of these companies.
USE OF ESTIMATES
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. Actual results could differ from those estimates. Financial statement
line items that include significant estimates include the allowance for
uncollectible receivables, accrued revenues, accrued restructuring charges,
goodwill and other intangibles, net, capitalized software and costs, net, and
income tax balances.
REVENUE RECOGNITION
The Company's revenues are generated primarily by licensing software systems and
providing outsourcing and professional services to the global insurance and
related financial services industries. All revenues are recorded in accordance
with Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2") and
Statement of Position 81-1, "Accounting for Performance of Construction-Type and
Certain Product-Type Contracts" ("SOP 81-1").
Software systems are licensed under standard nonexclusive and nontransferable
agreements, which generally have a noncancelable minimum term of six years and
provide for an initial license charge and a monthly license charge. The initial
license charge represents the grant of a right to use the software system
currently available at the time the license is signed. It is recognized as
revenue upon receipt of a contractual obligation and delivery of the software
system provided the fee is fixed, determinable and probable of collection. The
monthly license charge, which covers the right to use the product during the
term of the agreement, also provides access to Maintenance, Enhancements and
Services Availability ("MESA"). Under the maintenance provisions of MESA, the
Company provides telephone support and error correction to current versions of
licensed systems. Under the enhancement provisions of MESA, the Company will
provide unspecified enhancements to the licensed systems, which the Company may
deliver from time to time to licensees of those systems, if and when they become
generally available. The monthly license charge is recognized as revenue on a
monthly basis throughout the term of the MESA provision of the license
agreement. Services Availability allows customers access to professional
services, other than maintenance and enhancements, which are provided under
separate arrangements during the MESA term. Customers can acquire perpetual
rights to use the Company's software either at the time of the original license
or at subsequent periods during the license term by paying additional license
fees provided for in the contract. These fees are recognized as revenue when
the perpetual rights are granted.
The Company provides professional support services, including systems
implementation and integration assistance, and consulting and educational
services. These support services are available under services agreements and
are charged for separately under time and materials contracts and in some
circumstances under fixed price arrangements. Revenues from time and materials
arrangements are recognized as the services are performed.
Under fixed price arrangements, revenue is recognized on the basis of the
estimated percentage of completion of service provided. Changes in estimates to
complete and revisions in overall profit estimates are recognized in the period
in which they are determined (see Note 15). Provisions for losses, if any, are
recognized in the period in which they first become probable and reasonably
estimable.
From time to time the Company enters into joint development arrangements.
Although these arrangements are varied, the Company will undertake custom
development of a product or enhancement and typically retain all marketing
rights and titles to such development. Joint development arrangements are
generally provided for under fixed price agreements and in some circumstances on
a time and materials basis. The Company recognizes revenue equal to direct cost
on the same basis as professional support services; however, where technological
feasibility has already been established, the Company will capitalize the
portion of development costs which exceed customer funding provided under the
joint development arrangement.
The Company also offers Information Technology ("ITO") and Business Process
Outsourcing ("BPO") services ranging from making available Company software
licensed on a remote processing basis from the Company's data centers, complete
systems management, processing, administrative support and automated information
services to addressing the complete back office processing of insurance
transactions. Outsourcing services are typically provided under contracts
having terms from three to ten years. Long-term arrangements consisting of
multiple elements are accounted for under percentage of completion. Revenue is
recognized as services are performed and the obligations are fulfilled. Changes
in estimates to complete and revisions in overall profit estimates are
recognized in the period in which they are determined (see Note 15). Provisions
for losses, if any, are recognized in the period in which they become probable
and reasonably estimable.
Accrued revenues on the Company's accompanying consolidated balance sheets
represent revenues which the Company has earned in accordance with its
accounting policies but that are not yet billable under the terms of the
contracts as of the date of the balance sheet. These amounts are recoverable
over the remaining life of the contract and are classified as either current or
long-term. Generally, accrued revenues result from the timing of billings of
license charges which are less than 12 months, the provisions of services and
the application of percentage of completion accounting to the Company's
long-term contracts.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
MARKETABLE SECURITIES
Debt securities included in the Company's investment portfolio for which there
is a positive intent and ability to hold to maturity are carried at amortized
cost. Debt securities that may be sold prior to maturity and all marketable
equity securities are classified as available-for-sale and carried at fair
value. The fair value is estimated based on quoted market prices for those or
similar investments. Net unrealized gains and losses, determined on the
specific identification method, on securities classified as available-for-sale
are carried as a separate component of accumulated other comprehensive income.
Realized gains and losses are included in net income and the cost of securities
sold is based on the specific identification method. Marketable securities were
sold for cash proceeds of $2.1 and $3.3 million during 1999 and 1998,
respectively. There were no sales of marketable securities during 1997.
PROPERTY AND EQUIPMENT
Property and equipment, including support software acquired for internal use, is
stated at cost less accumulated depreciation and amortization. Property and
equipment is depreciated on a straight-line basis over its estimated useful
life.
Gains and losses on dispositions of property and equipment are determined based
on the difference between the cash plus the fair value of any assets received
(in the case of nonmonetary transactions) less the net book value of the asset
disposed of at the date of disposition.
GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
Identifiable intangible assets and goodwill are recorded and amortized over
their estimated economic lives or periods of future benefit. The lives
established for these assets are a composite of many factors which are subject
to change because of the nature of the Company's operations. This is
particularly true for goodwill which reflects value attributable to the
going-concern nature of acquired businesses, the stability of their operations,
market presence and reputation. Accordingly, the Company evaluates the
continued appropriateness of these lives and recoverability of the carrying
value of such assets based upon the latest available economic factors and
circumstances. The Company evaluates the recoverability of all long-lived
assets, including specific intangible assets and goodwill, based upon a
comparison of estimated future cash flows from the related operations with the
then corresponding carrying values of those assets. Impairment of value, if
any, is recognized in the period in which it is determined. A rate considered
to be commensurate with the risk involved is used to discount the cash flows for
any recognized impairment.
The Company amortizes goodwill over an estimated life of 3 to 15 years. Other
identifiable purchased intangible assets are being amortized on a straight-line
basis over their estimated period of benefit ranging from 3 to 10 years.
CAPITALIZED SOFTWARE COSTS
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed," ("SFAS 86") certain costs incurred in the internal development of
computer software and costs of purchased computer software, consisting primarily
of software acquired through business acquisitions, are capitalized. Such
capitalized costs are amortized over the "estimated useful life," generally 3 to
5 years, at the greater of the amount computed using (i) the ratio that current
gross revenues for a product bear to the total of current and anticipated future
gross revenues of that product or (ii) the straight-line method. Costs which
are capitalized as part of internally developed software primarily include
direct and indirect costs associated with payroll, computer time and allocable
depreciation and other direct allocable costs, among others. Product
enhancements are improvements to existing products that are intended to extend
the life or significantly improve the marketability of the original product.
Costs incurred for product enhancements are charged to expense as research and
development until technological feasibility of the enhancement has been
established. If the original product is no longer to be marketed, the net book
value of the original product is allocated to the cost of the enhancement. The
cost of the enhanced product, including the cost allocated from the original
product or enhancement if not allocated up, is amortized over the life of the
enhancement. If the original product will remain on the market along with the
enhancement, an allocation is made of the unamortized cost of the original
product between the original product and the enhancement. All internal costs
incurred prior to the establishment of technological feasibility have been
expensed as research and development costs during the periods in which they were
incurred and amounted to $0.5, $0.7 and $0.6 million for the years ended
December 31, 1999, 1998 and 1997, respectively. The amount by which unamortized
software costs exceeds the net realizable value, if any, is recognized as
accelerated amortization in the period it is determined (see Note 6).
The Company also capitalizes certain costs in accordance with Statement of
Position 98-1, "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). For projects to acquire, internally
develop or modify software solely to meet its internal needs and for which there
are no marketing plans ("internal-use software"), the Company expenses costs
that are incurred in the preliminary project stage and capitalizes certain costs
once the criteria in SOP 98-1 are met. Capitalized costs include payments to
third parties for materials and services consumed in developing or obtaining
internal-use software, employee compensation and benefits costs directly
associated with the internal-use software project, and interest costs incurred
during the development of internal-use software. Capitalized costs are
amortized over the estimated useful life of the internal-
use software, generally between 5 to 8 years. Capitalized internal-use software
costs are included in property and equipment (see Note 4).
INCOME TAXES
The provision for income taxes and corresponding balance sheet accounts are
determined in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("FAS 109"). Under FAS 109, the deferred tax
liabilities and assets are determined based on temporary differences between the
basis of certain assets and liabilities for income tax and financial reporting
purposes. These differences are primarily attributable to differences in the
recognition of depreciation and amortization of property, equipment and
intangible assets and certain software development costs and revenues.
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" ("FAS 128"). Weighted average common shares outstanding for all periods
have been restated to reflect the stock split in June 1998 (see Note 11). For
the Company, the numerator is the same for the calculation of both basic and
diluted EPS. The denominator for basic and diluted EPS is the same for the
period ended December 31, 1999 as the loss from operations would otherwise cause
the inclusion of common stock options to be anti-dilutive. The following is a
reconciliation of the denominator used in the EPS calculations (in thousands):
Year Ended December 31,
----------------------
1999 1998 1997
---- ------ ------
Weighted Average Shares
- ------------------------------
Basic EPS. . . . . . . . . . . 35,549 36,441 36,468
Effect of common stock options - 2,848 1,198
------ ------ ------
Diluted EPS. . . . . . . . . . 35,549 39,289 37,666
====== ====== ======
Weighted average shares for 1999 would have included 1,174,358 common stock
equivalents if the Company had recorded net income. All options to purchase
shares of common stock were included in the computation of diluted EPS for
1998.
FOREIGN CURRENCY TRANSLATION
The local currencies of the Company's foreign subsidiaries have been determined
to be their functional currencies. Assets and liabilities of foreign
subsidiaries are translated into United States dollars at current exchange rates
and resulting translation adjustments are included as a separate component of
accumulated other comprehensive income. Revenue and expense accounts of these
operations are translated at average exchange rates prevailing during the year.
Transaction gains and losses, which were not material, are included in the
results of operations of the period in which they occur.
The effect on the Company's operating revenues of adverse foreign currency
exchange fluctuations (stated as current year international revenues translated
at prior year average exchange rates) was $4.3 and $8.0 million for 1999 and
1998, respectively.
NEW ACCOUNTING STANDARDS
In June 1998, Statement of Financial Accounting Standard No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133") was issued,
effective for fiscal years beginning after June 15, 1999, with earlier adoption
encouraged. SFAS 133 requires companies to record derivative instruments on the
balance sheet as assets and liabilities, measured at fair value. Gain or losses
resulting from changes in the values of those derivatives are accounted for
depending on the use of the derivative. The Company does not enter into
derivative instruments
except occasionally to hedge the foreign currency exchange and interest rate
risk of specific projected transactions. The Company had no derivative
instruments at December 31, 1999 or 1998.
OTHER MATTERS
Certain prior year amounts have been reclassified to conform to current year
presentation.
NOTE 2. ACQUISITIONS
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 of up to $3.0 million contingent upon the future
performance of DORN, to be recorded as compensation expense as incurred until
2001. DORN owns the Riskmaster claims management software and the Quest
healthcare facility software, and provides risk and claims management software
and services mainly to the US self-insured market. The Company intends to grow
DORN's 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.
In December 1998, the Company acquired CAF Systemhaus fur
Anwendungsprogrammierung GmbH ("CAF"), headquartered in Gilching, Germany, and
related entities for approximately $7.0 million. CAF's Visual Project Modeling
Systems ("VP/MS") are designed to allow insurance companies to easily design
and implement computer code to administer new insurance products with reduced
programming cost and time to market.
On August 31, 1998, the Company purchased 100% of the outstanding common
stock of The Leverage Group, Inc. ("TLG") for $25.0 million in cash. An
independent appraiser estimated the fair market value of the assets acquired and
liabilities assumed including the in-process research and development ("IPR&D").
TLG owns PolicyLink, a family of systems designed to support the administrative
tasks associated with administration, commission processing, payout processing,
and disbursement generation for life insurance and annuity contracts. In
addition to continuing to market certain systems, the Company intends to
integrate the family of systems with its existing product, CyberLife , to
provide a local area network solution that administers products ranging from
traditional whole and term-life insurance to non-traditional,
wealth-accumulation products including annuities and variable annuities. The
Company recorded acquisition related charges of approximately $3.7 million
related to the purchase of TLG (see Note 6).
Approximately $2.0 million of these charges represent estimated purchased
IPR&D based on the income approach valuation method. This amount reflects the
fair value of a single subsystem that was substantially complete, is not being
marketed and will be used in the Company's research and development activities.
Consistent with the Company's basis of accounting for costs incurred to develop
its software, this subsystem is not capitalizable under SFAS 86 and has no
alternative future use other than in Research and Development. The remainder of
these charges represents the previously capitalized historical cost of software
purchased and internal
in-process development of the Company that is no longer capitalizable based on
SFAS 86 as a result of the acquisition.
The acquisitions above have been recorded using the purchase method of
accounting in accordance with Accounting Principles Board Option No. 16,
"Accounting for Business Combinations." Accordingly, the Consolidated
Statements of Operations of the Company include the results of operations from
the date of acquisition.
NOTE 3. RESTRUCTURING AND OTHER CHARGES
During 1999, the Company recorded restructuring charges of approximately
$12.9 million related to initiatives the Company took to eliminate costs through
reductions in force of approximately 102 employees and reductions in space
requirements. The Company also recorded $9.6 million cash charges incurred in
connection with the settlement of litigation with Liberty Life Insurance
Company. The 1998 and 1997 activity relates primarily to net rental payments on
a facility previously vacated.
The following table reflects the activity related to restructuring charges for
the three years ended December 31, 1999 (in thousands):
Current Non-current Total
Balance at December 31, 1996. . . . . $ 2,478 $1,340 $ 3,818
1997 net activity . . . . . . . . . . (2,333) 26 (2,307)
-------- ------- --------
Balance at December 31, 1997. . . . . $ 145 $1,366 $ 1,511
-------- ------- --------
1998 net activity . . . . . . . . . . 661 (599) 62
-------- ------- --------
Balance at December 31, 1998. . . . . $ 806 $ 767 $ 1,573
-------- ------- --------
1999 activity:
Additions:
Involuntary terminations. . . . . . 6,647 617 7,264
Vacated offices . . . . . . . . . . 3,819 1,470 5,289
Reductions:
Net rental payments on leased space (2,866) (140) (3,006)
Payments to terminated employees. . (4,776) (55) (4,831)
-------- ------- --------
Balance at December 31, 1999. . . . . $ 3,630 $2,659 $ 6,289
======== ======= ========
NOTE 4. PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows (in thousands):
Estimated December 31,
----------------
Useful Life 1999 1998
----------- ------- -------
(Years)
Land. . . . . . . . . . . . . . . . . . . . . . - $ 2,712 $ 2,562
Buildings and improvements. . . . . . . . . . . 10-40 76,101 61,509
Construction in progress. . . . . . . . . . . . - 1,588 11,922
Leasehold improvements. . . . . . . . . . . . . 1-10 7,560 5,808
Office furniture, fixtures and equipment. . . . 5-15 60,339 54,742
Computer and communications equipment
and support software. . . . . . . . . . . . . 2-5 105,369 109,763
Internal use software . . . . . . . . . . . . . 3-8 17,233 11,981
Other . . . . . . . . . . . . . . . . . . . . . 3-5 4,312 5,614
---------- --------
275,214 263,901
Less: Accumulated depreciation and amortization (132,347) (128,363)
---------- ----------
Property and equipment, net . . . . . . . . . . $ 142,867 $ 135,538
========== ==========
Depreciation and amortization charged to expense was $29.1, $26.4, and
$27.6 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS
A summary of goodwill and other intangible assets is as follows (in
thousands):
December 31,
-------------------
1999 1998
------- ----------
Goodwill. . . . . . . . . . . . . . . . . $102,259 $ 73,156
Customer lists. . . . . . . . . . . . . . 26,875 21,181
Contract acquisition costs. . . . . . . . - 15,000
Covenants not to compete. . . . . . . . . 11,083 9,158
Other . . . . . . . . . . . . . . . . . . 11,329 8,688
--------- ---------
151,546 127,183
Less: Accumulated amortization. . . . . . (40,522) (45,782)
--------- ---------
Goodwill and other intangible assets, net $111,024 $ 81,401
========= =========
Amortization charged to expense was $20.5, $10.8 and $10.6 million for the
years ended December 31, 1999, 1998 and 1997, respectively. During 1999, the
Company recorded $13.1, $29.6 and $10.4 million of intangible assets related to
the acquisitions of Legalgard, DORN and FAS, respectively. During 1998, the
Company recorded $20.4 and $2.6 million of intangible assets related to the
acquisitions of TLG and CAF, respectively.
Amortization of goodwill and other intangibles during 1999 includes
approximately $6.1 million of impairment charges related primarily to past
international acquisitions. These impairment charges were determined in the
1999 third quarter in accordance with Statement of Financial Accounting
Standards No. 121.
During 1999, the Company transferred $7.8 million of contract acquisition
costs at net book value ($15.0 million gross cost) to other receivables which
was paid in January 2000.
NOTE 6. CAPITALIZED SOFTWARE COSTS
A summary of capitalized software costs is as follows (in thousands):
December 31,
----------------------
1999 1998
-------- -------
Internally developed software . $ 267,276 $ 374,172
Purchased software. . . . . . . 47,913 36,067
---------- ----------
315,189 410,239
Less: Accumulated amortization. (159,293) (189,331)
---------- ----------
Capitalized software costs, net $ 155,896 $ 220,908
========== ==========
Amortization charged to expense was $149.4, $41.1 and $33.9 million for the
years ended December 31, 1999, 1998 and 1997, respectively. During 1999, the
Company recorded $9.0 and $7.5 million of purchased software related to the
acquisitions of Legalgard and DORN, respectively. During 1998, the Company
recorded $4.4 and $3.7 million of purchased software related to the acquisitions
of CAF and TLG, respectively.
During the third quarter of 1999, the Company recorded approximately $94.3
million of accelerated amortization related to costs determined to be
unrecoverable. Of this amount, approximately $77.6 million relates to Series II
and Series III, and approximately $16.7 million relates to international
operations.
During the fourth quarter of 1998, the Company recorded impairment charges
which have been reclassified to amortization in the amount of $9.6 million to
write-off the unamortized portion of capitalized software development costs of
principally two products. The Company had invested approximately $4.2 million
in the development of a new software product called Visual Product Builder
("VPB"). VPB was intended to allow insurance companies to easily design and
implement computer code to administer new insurance products with reduced
programming costs and time to market. During the Company's 1998 fourth quarter
strategic planning, it became apparent that for technical and architectural
reasons, VPB would not reach the level of market acceptance initially
anticipated. Also during the fourth quarter, the Company identified CAF as a
potential acquisition candidate, primarily based on CAF's successful development
of VP/MS. VP/MS provides substantially the same function as VPB but without the
technical and architectural issues that VPB presented. Therefore, the Company
wrote off $3.9 million of unamortized previously capitalized VPB internal
development costs. Also during its 1998 fourth quarter strategic planning, the
Company determined to cease marketing its policy administration software in the
Latin American market to pursue an alliance with another software vendor in that
market. Consequently, the Company wrote off $4.5 million of unamortized
internal development costs. The remaining amount of accelerated amortization
related to unamortized development costs of lesser products that were determined
to be unrecoverable.
NOTE 7. LONG-TERM DEBT AND OTHER BORROWINGS
Long-term debt is as follows (in thousands):
December 31,
------------------
1999 1998
-------- --------
Credit agreement borrowings $225,000 $ 85,000
Line of credit. . . . . . . 4,000 15,000
Notes payable . . . . . . . 2,000 812
-------- --------
231,000 100,812
Less: Current portion . . . 4,000 15,812
-------- --------
Long-term debt. . . . . . . $227,000 $ 85,000
======== ========
Interest cost incurred was $10.6, $2.9 and $3.7 million for the years ended
December 31, 1999, 1998 and 1997, respectively. Interest cost capitalized was
$0.2, $0.8 and $0.1 million during 1999, 1998 and 1997, respectively.
As of December 31, 1999, the Company had the following credit facilities:
a $200.0 million line of credit with a syndicate of financial institutions which
had $155.0 million outstanding, a $70.0 million term loan with three of the
financial institutions in the line of credit syndicate and a $5.0 million
uncommitted bank line of credit which had $4.0 million outstanding. Because of
the large net loss in the fourth quarter, the Company was in violation of one of
the covenants of both the line of credit and the term loan. Amendments of the
related agreements were executed in February and March 2000 that return the
Company to compliance.
Under these amendments, the line of credit will be reduced to $180.0
million and, further, to $125.0 million on April 1, 2001. The line of credit
will mature on July 1, 2001. Borrowings under the agreement bear interest at
rates based upon the applicable London Interbank Offering Rate ("LIBOR") plus a
spread of 2.75%. During 1999, loans under this agreement ranged in rates from
6.475% to 6.85%. Additionally, the Company pays a per annum fee on the
aggregate amount of the line of credit commitment of .50%.
Also, under the above-described amendments, the term loan will mature on
January 31, 2001. Borrowings under the term loan bear interest payable at per
annum rates based upon LIBOR plus increasing spreads over the term of the loan
from 2.75% to 4.75%. Additionally, the Company pays a per annum fee on the
aggregate amount of the term loan commitment of .50% and further fees of 1%,
1.25% and 1.5% of the amounts outstanding at July 15, October 15, and December
15, 2000, respectively.
Both the line of credit and term loan will be secured by assets of the
Company in 2000. The Company is also restricted from making certain investments
and will continue to be subject to certain covenants including, but not limited,
to the maintenance of an operating ratio and levels of tangible net worth.
Future credit availability under the Company's amended loan 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, described above, the Company has concluded that it must
restructure its capital base in order to reduce debt and take advantage of
various growth opportunities. Accordingly, the Board of Directors has
authorized the Company's management to explore various alternatives to achieve
efficiencies and obtain equity or other financing.
NOTE 8. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
On March 27, 1995, the Company entered into a long-term license and
maintenance agreement in order to acquire rights to certain operating system
management software products for use in the Company's worldwide data center
operations. The agreement, which was re-negotiated during 1999, has a term
ending June 2009, and may be renewed and extended for an additional period of
five years, subject to mutual agreement and other modifications. Minimum
contract payments by the Company over the remaining ten year term total
approximately $54.6 million payable in specified annual installments over the
ten-year period. In addition to minimum contract payments, the Company will pay
an annual supplemental revenue fee, subject to certain provisions in the
agreement, equal to a specified annual percentage of the Company's applicable
prior year annual gross revenues, less the specified annual installment for such
period. Minimum contract payments will be expensed on a straight-line basis over
the remaining ten-year term. Annual supplemental revenue fees, if any, will be
accrued in the period in which determined. The agreement provisions for the
supplemental revenue fee were not met for 1999 or 1998.
In June 1998, a Data Processing Services Agreement was completed between the
Company and Lockheed Martin Corporation ("Lockheed Martin"). Under its terms,
the Company turned over operations of its Blythewood, South Carolina, data
center to Lockheed Martin on July 1, 1998. The agreement sets forth an annual
fee for each of the ten years of the agreement, payable in monthly
installments. The amount was determined based on baseline resources, however,
it will be adjusted for over or under usage of resources, inflation, and
benchmarking results. The Company also made deposits of $2.6 million and $2.0
million in 1999 and 1998, respectively. These amounts will reduce future
payments beginning in June 2003. The baseline payments are as follows (in
thousands):
Year Ending December 31,
- ------------------------
2000 . . . $ 22,824
2001 . . . 25,439
2002 . . . 29,740
2003 . . . 30,825
2004 . . . 33,425
Thereafter 137,447
-------
Total. . . $279,700
========
During 1997, the Company entered into two five-year renewable lease and
maintenance agreements to lease certain data processing equipment for use in its
worldwide data center operations. Minimum lease payments over the initial terms
of the agreements aggregate $8.6 million payable in specified monthly
installments. At the end of the term of each agreement, the Company had the
option to purchase the leased equipment at fair market value, upgrade the
equipment with the latest technology, or discontinue each lease. Lockheed
Martin assumed these leases.
The Company leased certain data processing and related equipment primarily under
operating leases expiring through 2003. Rent expense under operating leases for
such equipment was $2.8, $5.2 and $7.9 million for the years ended December 31,
1999, 1998 and 1997, respectively.
The Company occupies leased facilities under various operating leases expiring
through 2014. The leases for certain facilities contain options for renewal and
provide for escalation of annual rentals based upon increases in the lessors'
operating costs. Rent expense under leases for facilities was $17.2, $12.8 and
$10.0 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
Future minimum lease obligations under noncancelable operating leases are stated
below and include payments over 16 years aggregating $3.2 million related to a
leasehold planned for future abandonment, net of subleases (in thousands):
Year Ending December 31,
- ------------------------
2000 . . . $ 18,696
2001 . . . 16,740
2002 . . . 15,255
2003 . . . 11,220
2004 . . . 9,377
Thereafter 57,807
--------
Total. . . $129,095
========
CONTINGENCIES - LEGAL PROCEEDINGS
The Company is involved in litigation commenced in February 2000, in the
District Court of Dallas County, Texas, by Chase Manhattan Mortgage Corporation
("Chase") related to the Company's mortgage loan origination products and
services. The complaint alleges breach of contract, breach of warranty,
misrepresentation, malpractice and mismanagement and seeks a declaratory
judgment and damages in excess of $20.0 million including amounts paid by Chase
to the Company, internal costs, consulting fees, opportunity costs, reputational
costs, attorneys fees and costs and punitive and exemplary damages. The Company
believes that the allegations are without merit and are subject to various
affirmative defenses and counterclaims and will vigorously defend the matter.
The Company is seeking to have the lawsuit dismissed or stayed pending
alternative dispute resolution proceedings as required by the agreements between
the parties.
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, tortious 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
tortious 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 January 7, 2000, following a morning news release by the Company that fourth
quarter earnings would be below analyst estimates, the Company and three of its
officers were named as defendants in an purported class action complaint filed
on behalf of purchasers of the Company's stock during the period between October
22, 1998 and January 6, 2000. Since this initial filing, additional purported
class actions have been filed, three in the United States District Court for the
District of South Carolina and two in the United States District Court for the
Southern District of New York (which are in the process of being transferred to
South Carolina), purportedly on behalf of purchasers of the Company's stock
during the period between October 22, 1998 and February 9 or 10, 2000.
These class action lawsuits allege violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 based on, among other things, alleged misleading
statements, alleged failure to disclose material adverse information, alleged
false financial reporting, alleged failure to report trends, demands or
uncertainties, and alleged failure to implement and maintain adequate internal
controls. Each of the complaints seeks unspecified
compensatory damages, including interest, costs and attorney fees.
At a hearing held on March 20, 2000, the court granted plaintiffs' motion to
consolidate all six cases, appointed four members of the class as lead
plaintiffs and approved their selection of lead counsel, directed that the
complaints in all but the first-filed case be dismissed without prejudice, and
directed plaintiffs to file an amended consolidated complaint within 45 days.
Although the Company has not yet filed formal responses to these lawsuits, the
Company believes the claims are without merit and is vigorously pursuing a full
defense of these actions and allegations.
On March 10, 2000, 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, commenced a purported class action against the Company, its
Chairman and three members of the Administrative Committee of the Plan. The
action 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.
Although the Company's time to respond to this complaint has yet to occur, the
Company believes the claims are without merit and intends to mount a vigorous
defense to the allegations.
In addition to the litigation described above, there are also various other
litigation proceedings and claims arising in the ordinary course of business.
The Company believes it has meritorious defenses and is vigorously defending
these matters.
On April 29, 1999, the Company received notice from the Internal Revenue Service
("IRS") of proposed adjustments to its 1994, 1995 and 1996 federal income tax
returns. Should the IRS prevail in its position, a charge to income of
approximately $16.3 million would result. The Company has submitted a response
to the IRS and is awaiting a formal decision. Furthermore, the Company strongly
disagrees with the proposed adjustments and is vigorously defending its
position.
While the resolution of any of the above matters could have a material adverse
effect on the results of operations in future periods, the Company does not
expect these matters to have a material adverse effect on its consolidated
financial position. The Company, however, is unable to predict the ultimate
outcome or the potential financial impact of these matters.
NOTE 9. INCOME TAXES
A reconciliation of the difference between the actual income tax provision
and the expected provision on pre-tax income (loss), computed using the
applicable statutory rate, is as follows:
Year Ended December 31,
---------------------
1999 1998 1997
---- ---- ----
Provision for taxes at the statutory rate . . . . . . . . (35.0)% 35.0% 35.0%
Increase (decrease) in provision from:
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . 1.5 1.1 1.1
State and local income taxes, net of federal tax effect ( 2.9) 1.5 1.3
Other . . . . . . . . . . . . . . . . . . . . . . . . . - 2.1 -
------- ----- -----
( 1.4) 4.7 2.4
------- ----- -----
Effective income tax provision rate . . . . . . . . . . . (36.4)% 39.7% 37.4%
======= ===== =====
An analysis of the income tax provision is as follows (in thousands):
Year Ended December 31,
-----------------------------
1999 1998 1997
------- ------- -------
Current domestic taxes . . . . . . . . . . . . . . . . . $ 2,225 $22,470 $ 6,983
Current foreign taxes. . . . . . . . . . . . . . . . . . (596) 4,039 8,464
--------- -------- --------
Total current taxes. . . . . . . . . . . . . . . . . . 1,629 26,509 15,447
--------- -------- --------
Deferred income taxes relating to temporary differences:
Depreciation and amortization
of property, equipment and intangibles . . . . . . . (585) (1,608) 2,138
Capitalized software development costs . . . . . . . . (39,466) 8,281 10,917
Impairment and restructuring of operations . . . . . . - - 865
Accounts receivable. . . . . . . . . . . . . . . . . . (3,628) - -
Litigation settlement and expenses, net. . . . . . . . 1,966 (553) 1,754
Contract loss reserve. . . . . . . . . . . . . . . . . (318) 1,787 24
Other. . . . . . . . . . . . . . . . . . . . . . . . . (746) 727 (1,112)
--------- -------- --------
(42,777) 8,634 14,586
--------- -------- --------
Total income tax provision . . . . . . . . . . . . . . . $(41,148) $35,143 $30,033
========= ======== ========
Actual current tax liabilities are lower than tax expenses reflected above
for 1999, 1998 and 1997 by $1.7, $16.9 and $2.0 million, respectively, for the
stock option deduction benefit recorded as a credit to stockholders' equity.
An analysis of the net deferred income tax assets and liabilities is as follows
(in thousands):
December 31,
-----------------
1999 1998
------- -------
Current deferred assets. . . . . . . . . . . $15,979 $ 9,336
------- -------
Long-term deferred assets:
Net operating loss carryforward. . . . . . 7,567 7,567
Foreign tax credit carryforward. . . . . . 2,202 6,161
Other. . . . . . . . . . . . . . . . . . . 20,081 11,059
------- -------
Long-term deferred assets. . . . . . . . 29,850 24,787
------- -------
Total deferred assets. . . . . . . . . $45,829 $34,123
======= =======
Long-term deferred liabilities:
Depreciation and amortization of property,
equipment and intangibles. . . . . . . . $20,156 $17,629
Capitalized software development costs . . 34,774 77,237
Other. . . . . . . . . . . . . . . . . . . 13,584 3,367
------- -------
Total deferred liabilities . . . . . . $68,514 $98,233
======= =======
Certain foreign subsidiaries of the Company have net operating loss
carryforwards at December 31, 1999 totaling approximately $23.4 million, which
may be used to offset future taxable income. The foreign carryforwards have no
expiration period. The Company has a valuation allowance of $1.4 million at
December 31, 1999, related to certain of the foreign net operating losses that
it does not anticipate utilizing.
No provision has been made for federal income taxes on unremitted earnings of
certain of the Company's foreign subsidiaries (approximately $32.0 million at
December 31, 1999) since the Company plans to permanently reinvest all such
earnings. However, if such earnings were remitted, there would be additional
federal income tax expense of $1.8 million.
The Company has foreign tax credit carryforwards at December 31, 1999 of $4.2
million which will expire as follows: $1.2 million on December 31, 2001 and
$3.0 million on December 31, 2002.
NOTE 10. EMPLOYEE BENEFIT PLANS
STOCK EMPLOYEE COMPENSATION TRUST
In February 1999, the Company created a Stock Employee Compensation Trust
(the "SECT"). The purpose of the SECT is to purchase shares of the Company's
common stock on the open market, which will be released to fund various
compensation related plans as necessary. The SECT is a non-qualified grantor
trust whose financial statements are consolidated with the Company's. Shares in
the trust will be presented in the manner of treasury stock, as a reduction of
stockholder's equity. During 1999, the SECT purchased 257,564 shares.
401(K) RETIREMENT SAVINGS PLAN
The Company offers the Policy Management Systems Corporation 401(k) Retirement
Savings Plan (the "Plan") to eligible employees. The Company matches 100% of
the first 3% of salary contributed by the participant and matches 50% of the
next 3% of salary contributed by the participant. Subject to limits imposed by
the Internal Revenue Service, the Internal Revenue Code and the Plan,
participants may also make additional before-tax and after-tax contributions
that are not subject to matching contributions by the Company. Participants
have several options as to how their contributions and vested Company
contributions are invested. Non-vested and current Plan year Company
contributions are invested in common stock of the Company. The Company's
contribution on behalf of participating employees was $7.1, $5.3 and $3.8
million for the years ended December 31, 1999, 1998 and 1997, respectively.
RESTRICTED STOCK OWNERSHIP PLAN
In August 1998, the Company established the Restricted Stock Ownership
Plan. Participation in the Plan is mandatory for United States-based officers
and directors until they have satisfied the applicable guidelines. Under the
guidelines, officers are required to hold Company stock in multiples of their
base salary ranging from 1 times salary for vice presidents, to 5 times salary
for the Chief Executive Officer. Directors who are not employees are required
to hold 5 times the annual retainer for directors. Directors and officers have
annual targeted percentages of ownership to achieve each year and are to achieve
100% of the guideline for their office within 6 years of the Plan's adoption or
their first election to the office to which this guideline is applicable.
Under the Plan, annual retainers for directors and annual bonuses for
officers are paid partially in cash and partially in restricted stock.
Generally, for those directors and officers who have achieved their annual
targeted percentages of ownership, annual retainers or any annual bonuses will
be paid 50% in cash and 50% in restricted stock (with a 50% addition to the
stock portion to adjust value for restrictions). For directors and officers who
have not achieved their annual targeted percentage of ownership, annual
retainers or any annual bonuses will be paid 100% in restricted stock (with only
a 25% addition to adjust value for restrictions). Directors and officers may
elect not to participate in the Plan after having achieved 100% of the stock
ownership guidelines applicable to their positions. In addition, other managers
who receive an annual bonus may elect to participate in a manner similar to
officers who are at guideline. Shares issued under the Plan generally vest
ratably over five years. The aggregate number of shares of common stock that
may be issued pursuant to all awards under the Plan is 500,000 shares. During
1999 and 1998, 47,730 and 1,836 shares respectively were issued under the Plan.
Also during 1999, 367 shares vested and 1,913 shares were forfeited.
STOCK OWNERSHIP PLAN
In May 1995, the Company established a stock ownership plan through which
eligible employees of the Company and its participating affiliates may acquire
shares of the Company's common stock through regular payroll deductions.
Participants may make after-tax contributions in multiples of $5.00, with a
minimum deduction per pay period of $10.00 and a maximum deduction per pay
period of the lesser of $900.00 or 10% of regular salary. The Company makes a
matching contribution equal to 15% of participants' contributions. Participants
who withdraw shares acquired under the Plan within two years of the date of
purchase are ineligible to make further contributions to purchase shares under
the Plan for twelve months after such withdrawal.
STOCK OPTION PLANS
The Company has three plans under which options to purchase shares of the
Company's common stock have been granted to eligible employees and members of
the Board of Directors of the Company and its subsidiaries. Options under the
1999 Stock Option Plan (the "1999 Plan") and the 1989 Stock Option Plan (the
"1989 Plan") expire ten years after the grant date and options under the 1993
Long Term Incentive Plan for Executives (the "1993 Plan") expire in January
2003. During 1999, options were granted under the 1999 Plan only. During 1998,
options were granted under the 1989 Plan and the 1993 Plan. During 1997,
options were granted under the 1989 Plan only.
Options granted under the 1999 Plan have exercise prices at 100% of market value
at date of grant and generally become exercisable at the rate of 25% per year
beginning one year from the date of grant.
Options granted under the 1989 Plan have exercise prices at 100% of market value
at date of grant and generally become exercisable either at the rate of 20%, 25%
or 33 1/3% per year beginning one year from date of grant.
Participants in the 1993 Plan have exercise rights as a percentage of market
value at date of grant as follows: 1993 - 105%; 1994 - 104%; 1995 - 103%; 1996 -
102%; 1997 - 101%; and 1998 - 100%. Options granted under the 1993 Plan became
exercisable as follows: 25% on January 1, 1995; 25% on January 1, 1997; and 50%
on January 1, 1999. For individuals who were selected to participate in the
1993 Plan, the number of options granted and what percentage becomes exercisable
on the above dates are determined according to formulas described in the 1993
Plan.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). This Statement requires that companies with
stock-based compensation plans either recognize compensation expense based on
new fair value accounting methods or continue to apply the provisions of
Accounting Principles Board Opinion No. 25 and disclose pro forma net income and
earnings per share assuming the fair value method had been applied.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FAS
123 requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals (or exceeds) the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
FAS 123 and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1999, 1998 and
1997, respectively: risk-free interest rates of 5.9%, 5.2% and 5.7%; volatility
factors of the expected market price of the Company's common stock of 38.9%,
36.2% and 35.4%; and weighted-average expected life of the options of 4.5, 4.3
and 4.4 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except per share data):
Year Ended December 31,
------------------------
1999 1998 1997
------ ------- -------
Net (loss) income
As reported . . . . . . . . . . $ (71,971) $53,271 $50,257
Pro forma . . . . . . . . . . . (76,190) 44,634 43,691
Basic (loss) earnings per share
As reported . . . . . . . . . . $ (2.02) $ 1.46 $ 1.38
Pro forma . . . . . . . . . . . (2.14) 1.22 1.20
Diluted (loss) earnings per share
As reported . . . . . . . . . . $ (2.02) $ 1.36 $ 1.33
Pro forma . . . . . . . . . . . (2.14) 1.14 1.16
Option activity under all of the stock option plans is summarized as
follows:
Year Ended December 31,
----------------------------------------------------------------
1999 1998 1997
-------------------- ------------------ -------------------
Weighted Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- ---------- ------- --------- --------
Outstanding at beginning of year . . . 6,184,767 $ 27.23 7,595,780 $24.61 6,917,764 $24.48
Granted. . . . . . . . . . . . . . . . 864,450 38.53 1,037,932 34.61 1,219,500 22.95
Exercised. . . . . . . . . . . . . . . (243,452) 23.42 (2,066,731) 21.93 (480,036) 18.72
Forfeited. . . . . . . . . . . . . . . (223,864) 32.18 (382,214) 24.07 (61,448) 22.96
----------- ------------ ----------
Outstanding at end of year . . . . . . 6,581,901 $ 28.69 6,184,767 $27.23 7,595,780 $24.61
=========== ============ ==========
Options exercisable at year end. . . . 4,221,004 2,500,327 3,371,184
Shares available for future grant. . . 945,300 0 1,829,468
Weighted-average fair value of options
granted during the year . . . . . . . $ 15.78 $ 12.80 $ 8.70
The following table summarizes information about fixed options outstanding at
December 31, 1999:
Options Outstanding
---------------------------
Options Exercisable
- -------------------
Weighted-
Average Weighted Weighted-
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life Price Shares Price
- --------------- --------- --------- ------ --------- -------
15. . . . 167,368 4.3 years $15.11 167,368 $15.11
16 to 18 446,546 5.9 years 17.16 288,866 16.97
21 to 24 2,627,504 5.6 years 22.79 1,902,498 22.72
25 to 27 603,414 5.0 years 25.88 430,664 25.72
33 to 40 2,032,905 7.1 years 36.53 727,444 34.54
41 to 46 704,164 3.0 years 40.97 704,164 40.97
---------- ---------
6,581,901. 4,221,004
========== =========
NOTE 11. STOCK SPLIT
In May 1998, the Company's Board of Directors approved a two-for-one stock
split effected in the form of a stock dividend, whereby each shareholder of
record as of June 1, 1998, received on June 15, 1998, one additional share of
common stock for each share owned as of the record date. As a result of the
split, 18,426,691 shares were issued and $0.2 million was transferred from
Retained Earnings to Common Stock. Weighted average common shares outstanding
and per share amounts for all periods presented have been restated to reflect
the stock split. Share amounts reflected on the Consolidated Balance Sheet and
Consolidated Statements of Changes in Stockholder's Equity and Comprehensive
Income reflect the actual share amounts for each period presented.
NOTE 12. CERTAIN TRANSACTIONS
LICENSING TRANSACTIONS
Licensing revenues in 1999 include $2.5 and $4.1 million from the licensing
of the recently acquired Legalgard and DORN products, respectively. Initial
license revenues in 1999 also include $2.9 million for a COA license to the
former owners of Legalgard, and $2.0 million for a license of several of the
Company's life and financial solutions products to the former owners of FAS.
License revenues in 1999 also include $3.3 million from the sale of hardware
remarketed by the Company in conjunction with licenses of its software.
Licensing revenues in 1998 include $2.2 million of license agreements with the
purchaser of the discontinued life information services segment.
Licensing revenues in 1997 include $1.8 million of initial license agreements
with the purchaser of the discontinued property and casualty information
services segment.
DISCONTINUED OPERATIONS
The Company sold its life information services segment in May 1998 for $23.8
million, net of selling expenses, resulting in a gain of $3.0 million, pre-tax
and a gain of $0.1 million, net of tax. The difference in gain for tax purposes
primarily results from the inability to deduct goodwill related to the sale for
tax purposes. The operations of this segment are presented as discontinued
operations in the accompanying Consolidated Statements of Operations. See Note
13 for income from operations of the discontinued segment.
The Company also recognized an additional loss during 1998 of $1.0 million, net
of tax, on the sale of its property and casualty information services segment.
This loss is included in discontinued operations in the accompanying
Consolidated Statements of Operations.
On August 31, 1997, the Company completed the sale of substantially all of the
assets of its property and casualty information services segment for cash
proceeds of $2.9 million. The Company retained the working capital of this
business (approximately $14.3 million). This transaction produced a
non-recurring gain of $1.7 million. Also, during the third quarter of 1997, the
Company abandoned a related business. As a result, the Company recorded a
non-recurring charge of $1.8 million, principally related to capitalized
software.
OTHER
During 1999 and 1998, the Company repurchased 1,015,513 and 2,143,400 shares
(2,388,200 restated for stock split) of the Company's stock on the open market,
respectively.
During 1997, the Company repurchased 79,900 shares (159,800 restated for stock
split) of the Company's stock on the open market.
NOTE 13. SEGMENT INFORMATION
The Company has classified its operations into five operating segments.
The operating segments are the five revenue-producing components of the Company
for which separate financial information is produced for internal decision
making and planning purposes. The segments are as follows:
1. Property and casualty enterprise software and services (generally referred
to as "property and casualty"). This segment provides software products, product
support, professional services and outsourcing primarily to the US property and
casualty insurance market.
2. Life and financial solutions enterprise software and services (generally
referred to as "life and financial solutions"). This segment provides software
products, product support, professional services and outsourcing primarily to
the US life insurance and related financial services markets.
3. International. This segment provides software products, product support,
professional services and outsourcing to the property and casualty and life
insurance markets primarily in Europe, Asia and Australia and Canada.
4. Property and casualty information services. This segment provided
information services, principally motor vehicle records and claims histories, to
US property and casualty insurers. It was sold in August 1997.
5. Life information services. This segment provided information services,
principally physician reports and medical histories, to US life insurers. It
was sold in May 1998.
Information about the Company's operations for the past three years is as
follows:
Year Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ----------
(In thousands)
REVENUES FROM EXTERNAL CUSTOMERS
Property and casualty . . . . . . . . . . . . . $ 279,035 $278,832 $249,331
Life and financial solutions. . . . . . . . . . 189,572 150,564 101,593
---------- --------- ---------
Total US revenues . . . . . . . . . . . . . . 468,607 429,396 350,924
International . . . . . . . . . . . . . . . . . 175,412 178,062 167,247
---------- --------- ---------
Total revenues from continuing operations $ 644,019 $607,458 $518,171
========== ========= =========
Discontinued Information Services Operations
Property and casualty . . . . . . . . . . . . . $ - $ - $ 64,649
Life. . . . . . . . . . . . . . . . . . . . . . - 11,968 64,611
(LOSS) INCOME FROM CONTINUING OPERATIONS
Property and casualty . . . . . . . . . . . . . $ (29,562) $ 77,563 $ 72,055
Life and financial solutions. . . . . . . . . . (4,846) 33,895 21,627
Corporate . . . . . . . . . . . . . . . . . . . (40,818) (26,434) (26,622)
---------- --------- ---------
Total US operating (loss) income. . . . . . . (75,226) 85,024 67,060
International . . . . . . . . . . . . . . . . . (29,046) 2,408 12,133
---------- --------- ---------
Operating (loss) income . . . . . . . . . . (104,272) 87,432 79,193
Equity in earnings of unconsolidated affiliates 1,908 1,163 1,189
Minority interest . . . . . . . . . . . . . . . (62) (104) -
Other income and expenses . . . . . . . . . . . (10,693) (2,136) (3,583)
Income tax (benefit) expense. . . . . . . . . . (41,148) 32,619 28,536
---------- --------- ---------
(Loss) income from continuing operations. . $ (71,971) $ 53,736 $ 48,263
========== ========= =========
DISCONTINUED INFORMATION SERVICES OPERATIONS
Property and casualty . . . . . . . . . . . . . $ - $ (1,586) $ 533
Life. . . . . . . . . . . . . . . . . . . . . . - 3,672 2,958
Other income and expenses . . . . . . . . . . . - (27) -
Income taxes. . . . . . . . . . . . . . . . . . - 2,524 1,497
---------- --------- ---------
Discontinued operations, net. . . . . . . . . $ - $ (465) $ 1,994
========== ========= =========
Year Ended December 31,
-----------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
DEPRECIATION AND AMORTIZATION
Property and casualty. . . . . . . . . . . . . . . $110,518 $30,146 $26,203
Life and financial solutions . . . . . . . . . . . 37,429 15,142 14,878
Corporate. . . . . . . . . . . . . . . . . . . . . 7,908 8,822 13,148
International. . . . . . . . . . . . . . . . . . . 45,707 32,858 16,682
Transferred to selling, general and administrative (6,948) (5,027) (3,153)
--------- -------- --------
Total depreciation and amortization. . . . . . . $194,614 $81,941 $67,758
========= ======== ========
Discontinued Information Services Operations
Property and casualty. . . . . . . . . . . . . . $ - $ - $ 179
Life . . . . . . . . . . . . . . . . . . . . . . - 1,011 954
As of December 31,
--------------------------------
1999 1998 1997
--------- -------- ---------
(In thousands)
IDENTIFIABLE ASSETS
Enterprise software and services
Property and casualty. . . . . . . . . $404,465 $405,788 $339,649
Life and financial solutions . . . . . 157,312 153,484 103,701
Life information services (discontinued) - - 21,368
Corporate. . . . . . . . . . . . . . . . 36,533 36,342 34,863
--------- --------- ---------
Total US identifiable assets . . . . 598,310 595,614 499,581
International. . . . . . . . . . . . . . 150,979 150,698 142,881
Eliminations . . . . . . . . . . . . . . (43,001) (27,614) (24,056)
--------- --------- ---------
Total identifiable assets. . . . . . $706,288 $718,698 $618,406
========= ========= =========
LONG-LIVED ASSETS
US . . . . . . . . . . . . . . . . . . . $402,005 $417,549 $361,383
International. . . . . . . . . . . . . . 90,928 83,923 71,214
--------- --------- ---------
Total long-lived assets. . . . . . . $492,933 $501,472 $432,597
========= ========= =========
NOTE 14. SIGNIFICANT RISKS AND UNCERTAINTIES
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 insurance and related 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 increasing competition for the Company's
products and services, and there can be no assurance that the Company's current
products and services will remain competitive, or that the Company's development
efforts will produce products with the cost and performance characteristics
necessary to remain competitive. Furthermore, the market for the Company's
products and services is characterized by rapid changes in technology and the
emergence of the Internet as a viable insurance distribution channel. The
Company's success will depend on the level of market acceptance of the Company's
products, technologies and enhancements, and its ability to introduce such
products, technologies and enhancements to the market on a timely and cost
effective basis, and maintain a labor force sufficiently skilled to compete in
the current environment.
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.
As discussed in Note 1, 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. Financial statement line items that
include significant estimates include the allowance for uncollectible
receivables, accrued revenues, accrued restructuring charges, goodwill and other
intangibles, net, capitalized software and costs, net, and income tax balances.
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 revenue and its operating income is
derived from initial licensing charges received as part of the Company's
software licensing activities. Because a substantial portion of these revenues
is recorded at the time new systems are licensed, there can be significant
fluctuations from period to period in the revenues and operating income derived
from licensing activities. This is attributable principally to the timing of
customers' decisions to enter into license agreements with the Company, which
the Company is unable to control. The Company believes that current and
potential customers' decisions to enter into license agreements with the Company
may be significantly affected by investments that have been made in existing
information systems for Year 2000 remediation and the uncertainty arising from
the emergence of the Internet as a viable distribution channel for insurance.
However, at this time the Company is unable to predict what the future impact of
these items, if any, will be.
As a result of the above and other factors, the Company's earnings and financial
condition can vary significantly from quarter-to-quarter and year-to-year. These
variations may contribute to volatility in the market for the Company's common
stock.
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of cash equivalents, marketable securities and
trade receivables. The Company places its cash, cash equivalents and marketable
securities with high credit quality entities and limits the amount of credit
exposure with any one entity.
In addition, the Company performs ongoing evaluations of the relative credit
standing of these entities, which are considered in the Company's investment
strategy.
Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the large number of entities comprising the
Company's customer base across the insurance industry. The Company performs
ongoing credit evaluations on certain of its customers' financial conditions,
but generally does not require collateral to support customer receivables. The
Company includes in its allowance for uncollectible accounts amounts based upon
factors surrounding the credit risk of specific customers, historical trends and
other information.
NOTE 15. ACCOUNTING CHANGES
Change in Accounting Principle
On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements ("SAB 101"), which among other guidance
clarifies certain conditions regarding the culmination of an earnings process
and customer acceptance requirements in order to recognize revenue. The Company
identified approximately $3.2 million of revenue recognized previously in 1999
requiring adjustment due to SAB 101. These adjustments arose from fees of $3.0
million received on two joint marketing arrangements in the second quarter, and
the existence of acceptance terms in a single DORN license agreement totaling
$0.2 million in the third quarter. As required by SAB 101, the Company has
treated these adjustments as a change in accounting principle in accordance with
Accounting Principles Board Opinion No. 20, Accounting Changes, and therefore
has deferred this revenue in 1999. A cumulative catch-up adjustment of $3.2
million was recorded in the fourth quarter of 1999.
Changes in Estimates
As a result of 1999 fourth quarter changes in estimates related to two
long-term services agreements accounted for under the percentage of completion
method, the Company recorded a cumulative catch-up adjustment in the fourth
quarter of 1999 of $8.4 million. The adjustment has been recorded as a
reduction in Services revenues. In March 2000, certain business conditions and
a new agreement led to the international adjustment of $5.3 million while the
domestic adjustment of $3.1 million was a result of customer notification of the
exercise of an early termination by convenience clause.
During the fourth quarter of 1999 and continuing into the first quarter of 2000,
rising interest rates caused significant declines in mortgage loan originations
and reduced profits for mortgage loan originators. This in turn led many
existing and prospective customers of the Company's Banking Division to
re-evaluate their loan origination software system requirements. Consequently,
the Company established reserves against approximately $8.3 million of accounts
receivable based on disputes with several significant Banking Division
customers. The Company is in continuing dialogue with these customers and is in
various stages of negotiations or resolution concerning these disputes.
During the fourth quarter of 1999, the Company recorded approximately $18.1
million of accelerated amortization with $16.3 million related to its Banking
Division and approximately $1.8 million for several smaller software products
primarily in its international segment.
NOTE 16. SUBSEQUENT EVENT
On January 21, 2000, the Company announced its intent to change the name of
the Company to Mynd Corporation. Approval requires a two-thirds vote of the
shareholders at a shareholders meeting to be scheduled. If approved by
shareholders, the Company will formally change its legal name with relevant
authorities including the New York Stock Exchange. Meanwhile, management
intends to proceed with a campaign to promote acceptance and awareness of the
new name.
POLICY MANAGEMENT SYSTEMS CORPORATION
QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS
Reported Restated Reported Restated
First First Second Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- --------
(In thousands, except per share data)
(Unaudited)
1999
Revenues . . . . . . . . . . . . . $161,475 $160,289 $172,346 $173,531 $ 168,788 $141,411
Operating income (loss). . . . . . 23,510 22,480 25,981 27,090 (107,690) (46,152)
Other (expenses) and income, net . (1,282) (1,241) (2,564) (2,564) (3,325) (3,563)
Income (loss) before income taxes. 22,330 21,341 23,525 24,634 (110,709) (48,385)
Cumulative effect of change in
accounting principle . . . . . . - - - - - (3,200)
Net income (loss). . . . . . . . . $ 14,068 $ 13,451 $ 14,820 $ 15,512 $ (70,448) $(30,486)
Basic earnings (loss) per share. . $ 0.39 $ 0.37 $ 0.42 $ 0.44 $ (1.99) $ (0.86)
Diluted earnings (loss) per share. $ 0.37 $ 0.35 $ 0.41 $ 0.42 $ (1.99) $ (0.86)
Impact on basic earnings (loss)
per share. . . . . . . . . . . . - - - - - $ (0.06)
Impact on diluted earnings (loss)
per share. . . . . . . . . . . . - - - - - $ (0.06)
The first and second quarters of 1999 have been restated to reflect
principally the correction of an error caused by the oversight or misuse of the
facts that existed at the time the financial statements were prepared
surrounding the resolution of a dispute concerning a license agreement.
On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements ("SAB 101"), which among other
guidance clarifies certain conditions regarding the culmination of an earnings
process and customer acceptance requirements in order to recognize revenue. The
Company identified approximately $3.2 million of revenue recognized previously
in 1999 requiring adjustment due to SAB 101. These adjustments arose from fees
of $3.0 million received on two joint marketing arrangements in the second
quarter, and the existence of acceptance terms in a single DORN license
agreement totaling $0.2 million in the third quarter. As required by SAB 101,
the Company has treated these adjustments as a change in accounting principle in
accordance with Accounting Principles Board Opinion No. 20, Accounting Changes,
and therefore has deferred this revenue in 1999. A cumulative catch-up
adjustment of $3.2 million was recorded in the fourth quarter of 1999.
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- --------
(In thousands, except per share data)
1998
Revenues. . . . . . . . . . . . . $140,421 $144,889 $151,303 $170,845
Operating income. . . . . . . . . 20,848 22,375 22,429 21,780
Other (expenses) and income, net. (425) (370) (603) (738)
Income from continuing operations
before income taxes . . . . . . 20,628 22,208 21,911 21,608
Discontinued operations, net. . . 322 (386) - (401)
Net income. . . . . . . . . . . . $ 13,189 $ 13,596 $ 13,171 $ 13,315
Basic earnings per share. . . . . $ 0.36 $ 0.37 $ 0.36 $ 0.37
Diluted earnings per share. . . . $ 0.34 $ 0.34 $ 0.33 $ 0.34
1997
Revenues. . . . . . . . . . . . . $115,083 $123,828 $131,955 $147,305
Operating income. . . . . . . . . 15,774 16,643 20,738 26,038
Other (expenses) and income, net. (790) (1,012) (1,007) (774)
Income from continuing operations
before income taxes . . . . . . 15,354 15,951 20,005 25,489
Discontinued operations, net. . . 468 694 386 446
Net income. . . . . . . . . . . . $ 10,092 $ 10,694 $ 12,937 $ 16,534
Basic earnings per share. . . . . $ 0.28 $ 0.29 $ 0.35 $ 0.45
Diluted earnings per share. . . . $ 0.27 $ 0.29 $ 0.34 $ 0.43
The results of operations in 1998 third and fourth quarters include $3.7
million and $9.6 million of charges related to the acquisition of TLG and
accelerated amortization, respectively. For a further discussion of these
charges, see Management's Discussion and Analysis of Financial Condition and
Results of Operations.
SCHEDULE II
POLICY MANAGEMENT SYSTEMS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Additions
-------------------
Balance Charged
At Charged to Balance
Beginning to Other at End
Description of Period Expenses Accounts Deductions of Period
- -----------------------------------------------------------------------------------------------
(In thousands)
Allowance for uncollectible amounts
Year ended December 31, 1999. . . . . . . . . . . $2,051 12,350 - (1,401)(1) $13,000
Allowance for uncollectible amounts
Year ended December 31, 1998. . . . . . . . . . . $2,628 90 - (667)(1) $ 2,051
Allowance for uncollectible amounts
Year ended December 31, 1997. . . . . . . . . . . $ 883 2,951 - (1,206)(1) $ 2,628
Accrued restructuring and lease termination costs
Year ended December 31, 1999. . . . . . . . . . . $1,573 9,472(2) - 4,756 (3) $ 6,289
Accrued restructuring and lease termination costs
Year ended December 31, 1998. . . . . . . . . . . $1,511 62(2) - - $ 1,573
Accrued restructuring and lease termination costs
Year ended December 31, 1997. . . . . . . . . . . $3,818 109(2) - (2,416)(3) $ 1,511
Allowance for deferred tax assets
Year ended December 31, 1999. . . . . . . . . . . $1,677 - - (1,677)(4) $ -
Allowance for deferred tax assets
Year ended December 31, 1998. . . . . . . . . . . $2,600 - 406 (1,329)(4) $ 1,677
Allowance for deferred tax assets
Year ended December 31, 1997. . . . . . . . . . . $2,804 - (204) - $ 2,600
<FN>
Notes:
(1) Write-off of amounts uncollectible.
(2) Principally relates to amounts estimated for employee severance and outplacement and to
ongoing lease obligations and/or terminations for the planned future abandonment of certain
leased office facilities, including credit amounts for changes in these estimates.
(3) Principally cash payments related to lease terminations and employee severance and
outplacement costs.
(4) Utilization of capital loss carryforwards.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS
POLICY MANAGEMENT SYSTEMS CORPORATION
Our audits of the consolidated financial statements of Policy Management
Systems Corporation referred to in our report dated March 30, 2000 appearing on
page 30 of this Form 10-K/A also included an audit of the financial statement
schedule listed in the index on page 29 of this Form 10-K/A. In our opinion,
this financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
Consolidated Financial Statements.
PricewaterhouseCoopers LLP
Atlanta, Georgia
March 30, 2000
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information as of April 14, 2000 is furnished with respect to
each director and executive officer:
Name Age Position with the Company
G. Larry Wilson. . . . . 53 Chairman of the Board, President and Chief Executive Officer
David T. Bailey. . . . . 53 Executive Vice President
Alfred R. Berkeley, III. 55 Director
Donald W. Feddersen. . . 65 Director
Michael D. Gantt . . . . 48 Senior Vice President
Harald J. Karlsen. . . . 53 Senior Vice President
Stephen G. Morrison. . . 50 Executive Vice President, Secretary, General Counsel and
Chief Administrative Officer
Dr. John M. Palms, Ph.D. 64 Director
Michael W. Risley. . . . 43 Executive Vice President
Joseph D. Sargent. . . . 70 Director
John P. Seibels. . . . . 58 Director
Richard G. Trub. . . . . 69 Director
Timothy V. Williams. . . 50 Executive Vice President and Chief Financial Officer
G. Larry Wilson - Chairman of the Board, President and Chief Executive Officer
of the Company (since 1980). Current term as Director will expire in 2001. He
has been employed by the Company since its inception.
David T. Bailey - Executive Vice President of the Company since 1986.
Responsible for the Property and Casualty Group. Employed by the Company since
1981.
Alfred R. Berkeley, III - Director since 1997. Mr. Berkeley has served as
President of The Nasdaq Stock Market, Inc. since May 1996. Before that, he
served as Managing Director and Senior Banker of Alex. Brown & Sons
Incorporated. He is currently also a director of Princeton Capital Management,
Inc. He also serves as a director of several privately owned companies.
Donald W. Feddersen - Director since 1997 and previously served as a Director
from January 1983 to October 1994. Mr. Feddersen is currently a private
investor. Before that, he was General Partner of Charles River Ventures. He
serves as a director of a number of privately-owned high technology companies.
Michael D. Gantt - Senior Vice President of the Company since 1998. Responsible
for the Claims and Risk Management Group. Employed by the Company since 1995.
Harald J. Karlsen - Senior Vice President of the Company since 1998.
Responsible for the international operations in Europe, Africa and the Middle
East. Employed by the Company since 1993.
Stephen G. Morrison - Executive Vice President, Secretary and General Counsel of
the Company since January 1994 and Chief Administrative Officer since 1997.
Responsible for the administration of the legal affairs of the Company, the
Legal and Business Services Group which includes legal, human resources, quality
and corporate marketing. Employed by the Company since 1994.
Dr. John M. Palms, Ph.D. - Director since 1992. Dr. Palms is the President of
the University of South Carolina. He also serves as a director of Peco Energy
Company and Fortis, Inc., and serves as Chairman of the Board of the Institute
of Defense Analyses.
Michael W. Risley - Executive Vice President of the Company since November 1998.
Responsible for the Financial Solutions Group. Employed by the Company since
1980.
Joseph D. Sargent - Director since 1986. Mr. Sargent is the Chairman of
Bradley, Foster, & Sargent, Inc. He serves as Vice Chairman for Connecticut
Surety Corporation and until February 1998, he served as Treasurer. He also
serves as director for each of Trenwick Group, Inc., Mutual Risk Management
Ltd., MMI Companies, Inc., and Command Systems, Inc.
John P. Seibels - Director since 1981. Mr. Seibels is currently a private
investor. He also serves as a director of The Seibels Bruce Group, Inc. and
certain of its subsidiaries.
Richard G. Trub - Director since 1981. Mr. Trub is the Chairman and Treasurer
of Trubco, Inc. He previously held the position of Senior Vice President with
the Connecticut National Bank.
Timothy V. Williams - Executive Vice President and Chief Financial Officer of
the Company since February 1994. Responsible for the Financial and Operational
Services Group. Employed by the Company since February 1994.
On July 22, 1997, the Securities and Exchange Commission ("SEC") commenced
a civil proceeding against the Company and certain current and former officers
and employees of the Company, including Messrs. Wilson and Bailey. In its
complaint, the SEC alleged that the Company and the named individuals had
violated certain provisions of the Securities Exchange Act of 1934 relating to
reporting, books and records and internal controls in connection with the
Company's 1990-1993 financial statements and reports. Simultaneously with the
filing of the complaint, all defendants filed consents in which they neither
admitted nor denied the allegations made, agreed to the entry of an injunction
requiring future compliance with those provisions of the federal securities
laws, and agreed to pay certain civil penalties. The Company agreed to pay a
civil penalty of one million dollars and each individual agreed to pay a civil
penalty of twenty thousand dollars.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company believes, during 1999, that all required filings with the SEC
of reports of stock ownership (and changes thereto) by its directors, officers
and 10% stockholders were timely made.
ITEM 11. EXECUTIVE COMPENSATION
The following table gives the compensation earned, including stock options
granted, by the Chief Executive Officer and the next four most highly
compensated executive officers for the years 1999, 1998 and 1997. All of these
officers are referred to as the "Executive Group."
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Awards
------
Number of
Annual Compensation Restricted Securities
-------------------
Name and Stock Underlying All Other
Principal Position Year Salary Bonus (1) Awards(2) Options Granted(3)
------------------ ---- ------ --------- --------- ------------------
Compensation(4)
---------------
G. LARRY WILSON . . . . . . . . . . . 1999 $886,379 $ 0 $ 0 75,000 $10,845
1998 783,750 235,950 353,925 150,000 10,710
President and Chief Executive Officer 1997 712,500 429,000 0 150,000 10,635
DAVID T. BAILEY . . . . . . . . . . . 1999 $429,929 $ 0 $ 0 35,000 $ 7,200
1998 412,307 0 0 70,000 7,200
Executive Vice President. . . . . . . 1997 368,660 155,400 0 70,000 7,125
STEPHEN G. MORRISON . . . . . . . . . 1999 $557,818 $ 0 $ 0 35,000 $10,845
1998 493,260 148,500 222,750 70,000 10,710
Executive Vice President, General . . 1997 448,469 270,000 0 70,000 10,635
Counsel, Secretary and
Chief Administrative
Officer
MICHAEL W. RISLEY . . . . . . . . . . 1999 $389,434 $ 0 $ 0 200,000 $ 7,200
1998 271,371 67,931 101,897 20,694 7,200
Executive Vice President. . . . . . . 1997 224,795 43,775 0 20,000 6,432
TIMOTHY V. WILLIAMS . . . . . . . . . 1999 $412,628 $ 0 $ 0 35,000 $ 7,200
1998 371,118 111,600 167,400 70,000 7,200
Executive Vice President and Chief. . 1997 343,994 207,000 0 70,000 7,125
Financial Officer
__________________________
- -------------------------------------
<FN>
(1) Reflects amount earned in year indicated even though actually paid in following year.
(2) Shares of restricted stock awarded to the Executive Group in 1999 and the value of
such shares at December 31, 1999 were as follows: Wilson - 6,731 ($172,061); Morrison - 4,236
($108,283); Risley - 1,938 ($49,540); and Williams - 3,184 ($81,391). The values set forth in
this column represent the portion of each executive officers' annual bonus payable in
restricted stock, which awards were made on February 8, 1999 at $52.5813 per share. The
restricted shares vest in 20% increments on January 1 of each of the five calendar years
following the year in which the restricted shares are awarded. Restricted shares will
participate in dividends the same as other shares of common stock; however, the Company has
never declared cash dividends.
(3) Adjusted for the two-for-one stock split on June 1, 1998.
(4) Amounts shown are matching contributions from the Company under its 401(k) Retirement
Savings Plan and the Company's Employee Stock Purchase Plan.
The following table sets forth certain information regarding options for
common stock granted to the Executive Group during 1999. The table includes the
potential realizable value which would exist based on assumed annual compounded
rates of common stock price appreciation of five and ten percent over the full
ten-year term of the options.
OPTIONS GRANTED IN 1999
Individual Grants
-----------------
Percent
Number Of Total Potential Realizable Value
Of Securities Options Exercise at Assumed Annual Rates
Underlying Granted to Price Expiration Of Stock Price Appreciation
Options Employees Per Date of for Option Term (1)
-------------------
Name Granted In 1999 Share Options 5% 10%
---- ------- ------- ----- ------- -- ---
All Stockholders. . $895,002,412 (2) $2,268,109,833 (2)
G. Larry Wilson . . 75,000 (3)(5) 8.7% $40.125 May 11, 2009 $1,892,581 $ 4,796,167
David T. Bailey . . 35,000 (3)(5) 4.0% $40.125 May 11, 2009 $ 883,204 $ 2,238,211
Stephen G. Morrison 35,000 (3)(5) 4.0% $40.125 May 11, 2009 $ 883,204 $ 2,238,211
Michael W. Risley . 180,000 (3)(5) 20.8% $40.125 May 11, 2009 $4,542,194 $11,510,802
20,000 (4)(5) 2.3% $20.500 November 8, 2009 $ 257,847 $ 653,434
Timothy V. Williams 35,000 (3)(5) 4.0% $40.125 May 11, 2009 $ 883,204 $ 2,238,211
<FN>
(1) This information has been included to illustrate how the stockholders will have fared compared to
each of the named executives if the assumed appreciation is achieved based upon the option grant date of May
11, 1999.
(2) The potential realizable value for all stockholders is based on the number of shares of common stock
outstanding on May 11, 1999 (the date the options described in Note 3 below were granted), and assumes the
stockholders purchased the common stock for $40.125 (which was the fair market value of the common stock on
May 11, 1999) and held the common stock until May 11, 2009.
(3) These options were granted pursuant to the 1999 Stock Option Plan. The exercise price is the fair
market value of the common stock on May 11, 1999, which was the date of grant.
(4) These options were also granted pursuant to the 1999 Stock Option Plan. The exercise price is the
fair market value of the common stock on November 8, 1999, which was the date of grant.
(5) The options become exercisable in one-fourth increments on each of the first four anniversary dates
of the grant date. All such options would become immediately exercisable in the event of a change in control
of the Company and the optionee would have the right to exercise such options for a period of ninety days
after termination of employment. In the event of a dissolution or liquidation of the Company or any merger
or combination in which the Company is not the surviving entity, each option granted shall automatically
become fully and immediately vested and exercisable.
The following table sets forth information for the Executive Group
regarding stock options exercised during 1999 and the value of "in-the-money"
options. "In-the-money" options have a positive difference between the exercise
price of such stock option and $25.5625, the closing price of the Company's
common stock on December 31, 1999.
AGGREGATED OPTIONS EXERCISED IN 1999
AND 1999 YEAR-END OPTION VALUES
Number of Securities
Shares Underlying Value of Unexercised
Acquired Unexercised Options In-the-Money Options
On Value at December 31, 1999* at December 31, 1999**
--------------------- ----------------------
Name Exercise Realized Exercisable Unexercisable Exercisable
---- -------- -------- ----------- ------------- -----------
Unexercisable
-------------
G. Larry Wilson . . 0 $ 0 1,372,500 352,500 $3,498,812 $289,312
David T. Bailey . . 0 $ 0 297,667 164,500 $ 312,444 $135,012
Stephen G. Morrison 0 $ 0 315,834 172,500 $1,611,352 $259,762
Michael W. Risley . 0 $ 0 81,790 238,600 $ 193,709 $200,565
Timothy V. Williams 47,384 $1,069,789 182,500 152,500 $ 376,387 $130,762
<FN>
* All shares adjusted for the two-for-one stock split on June 1, 1998.
** Value represents the aggregate excess of the market price of the common
stock on December 31, 1999, which was $25.5625, over the exercise price for the
options. All options included in the table have an exercise price equal to or
greater than the fair market value of the common stock on the dates of grant.
COMPENSATION OF DIRECTORS. In 1999, non-employee directors received the
following compensation:
- - An annual fee of $18,000 (payable in cash and restricted stock pursuant to
the Restricted Stock Ownership Plan as discussed above);
- - $2,000 for each Board meeting attended;
- - $1,000 for each committee meeting attended in person (if not on a regular
Board meeting date);
- - A $500 fee, plus $250 per hour for each additional hour or part thereof
for participation in meetings by telephone (not to exceed $1,000 per meeting);
- - Travel expenses of attending Board and committee meetings; and
- - $1,000 per day for attending to Company business in person at non-Board or
committee meetings.
Directors who are also full-time employees of the Company do not receive
additional compensation for their services as directors.
DEFERRED COMPENSATION AGREEMENT. Mr. Wilson is covered by a Deferred
Compensation Agreement providing annual remuneration of $25,000 upon retirement,
death or total disability. The Agreement, which provides for monthly payments
over a fifteen-year period, is contingent primarily upon his continued
employment until such an event occurs, and the deferred benefits are not vested
until that time. Until or unless such a qualifying event occurs, Mr. Wilson is
not entitled to any payments under the Agreement. The Company owns life
insurance contracts covering Mr. Wilson, of which it is the beneficiary, in an
aggregate amount equal to or in excess of the total benefit.
EMPLOYMENT AGREEMENTS. The Company has an Employment Agreement with each of
Messrs. Wilson, Bailey, Morrison, Risley, and Williams, which set initial annual
salaries at their then current annual salary, subject to future increases in
accordance with the Company's practices. In the event of a change in control of
the Company (as defined in the Agreement), the executives' then base salary will
increase to 150% of the base salary in effect immediately prior to the change in
control.
The term of each executive officer's Employment Agreement continues until
December 31, 2003. The term is subject to annual twelve month extensions,
unless six months notice of non-extension is given. In the event of a change in
control, the term is extended automatically twelve months.
The Employment Agreements may be terminated by the Company for cause. If
the executive is terminated for reasons other than for cause or if the executive
terminates for good reason, the executive will receive annual severance payments
for the remaining term of the Employment Agreement equal to base salary plus an
amount equal to either the highest annual bonus received in the two years
preceding termination or, if after a change in control, 150% of the highest
annual bonus during the two years preceding termination. Should such payments
be subject to an excise tax pursuant to Section 4999 of the Internal Revenue
Code, or similar law, additional compensation as is necessary to offset such tax
effects also will be paid to the executives. The severance payments under the
Employment Agreements would cease in the event of reasonable proof of any
violation of the non-competition, non-solicitation of employees, or
confidentiality provisions of the Employment Agreement.
The stock options of the executive officers named in the Summary
Compensation Table above would become immediately exercisable in the event of a
change in control. In no event, however, may an optionee exercise such options
after the tenth anniversary date of the date of grant of such options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, the Compensation Committee of the Board of Directors consisted
of Messrs. Sargent and Berkeley and Dr. Palms. None of the Committee members
are or were previously employees or officers of PMSC or any of its subsidiaries.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This table sets forth certain information based on Schedules 13G filed with
the SEC, as of April 14, 2000, regarding beneficial owners of more than five
percent of the Company's common stock.
PRINCIPAL STOCKHOLDERS
Common Stock Percentage
Name and Address Beneficially Owned of Class(1)
- ------------------ ------------------- --------------
CAPITAL GROUP INTERNATIONAL, INC. ("CGI") 4,032,950(2) 11.33%
11100 Santa Monica Boulevard
Los Angeles, California 90025
THE REGENTS OF THE UNIVERSITY . . . . . . 2,706,400 (3) 7.60%
OF CALIFORNIA ("REGENTS")
1111Broadway, 14th Floor
Oakland, California 94607
WESTPORT ASSET MANAGEMENT, INC. . . . . . 2,472,150 (4) 6.95%
("WESTPORT")
253 Riverside Avenue
Westport, Connecticut 06880
<FN>
___________________
(1) Determined using the number of shares of common stock outstanding on
April 14, 2000, which was 35,586,038.
(2) Of the shares reported, CGI has sole voting power for none of the
shares, shared voting power for 3,278,450 of the shares, shared dispositive
power for none of the shares and sole dispositive power for all of the shares.
This information is based on information contained in the Schedule 13G filed by
CGI with the SEC on February 11, 2000.
(3) Of the shares reported, Regents has sole voting and dispositive power
for all of the shares. This information is based on information contained in the
Schedule 13G filed by Regents with the SEC on February 11, 2000.
(4) Of the shares reported, Westport has sole voting power for 372,650 of
the shares, shared voting power for 1,769,500 of the shares, sole dispositive
power for 372,650 of the shares and shared dispositive power for 2,099,500 of
the shares. This information is based on information contained in the Schedule
13G filed by Westport with the SEC on February 16, 2000.
The following table sets forth, as of April 14, 2000, beneficial ownership
of common stock by each director and executive officer named in the Summary
Compensation Table above, and by all directors and all executive officers as a
group.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
AMOUNT AND NATURE
NAME OF BENEFICIAL SHARES SUBJECT PERCENTAGE
OF BENEFICIAL OWNER OWNERSHIP (1) TO OPTION (2) OF CLASS
- --------------------- ----------------- ----------------- ----------
(3)
- ---
Alfred R. Berkeley, III. . . 32,148 30,000 *
Donald W. Feddersen. . . . . 32,106 30,000 *
Dr. John M. Palms, Ph.D. . . 28,598 25,000 *
Joseph D. Sargent. . . . . . 80,650 70,002 *
John P. Seibels. . . . . . . 81,657 75,000 *
Richard G. Trub. . . . . . . 28,148 25,000 *
G. Larry Wilson. . . . . . . 1,813,363 1,526,250 4.9%
David T. Bailey. . . . . . . 375,337 369,417 1.0%
Stephen G. Morrison. . . . . 394,671 381,584 1.1%
Michael W. Risley. . . . . . 163,635 138,790 *
Timothy V. Williams. . . . . 250,736 246,250 *
Directors and all executive
officers as a group
(13 in number) . . . . . . 3,357,075 2,986,502 8.7%
<FN>
____________________
(1) Each individual has sole voting power and sole dispositive power, except
that for the following unvested shares awarded under the Restricted Stock
Ownership Plan, the respective individual does not have dispositive power for
the number of shares indicated: Berkeley - 1,956; Feddersen - 1,956; Palms -
1,956; Sargent - 1,956; Seibels - 465; Trub - 1,956; Wilson - 5,385; Morrison -
3,389; Risley - 1,551; Williams - 2,548; and all other executive officers - 680.
(2) These shares, which are included in the "Amount and Nature of Beneficial
Ownership" column, are subject to option on or before June 13, 2000, pursuant to
the Company's various stock option plans.
(3) Where indicated by asterisk, beneficial ownership represents less than
one percent of the sum of the total number of shares of common stock outstanding
on April 14, 2000, plus the total shares subject to option.
On March 30, 2000, the Company and Politic Acquisition Corporation
("Politic"), an affiliate of Welsh, Carson, Anderson & Stowe, entered into a
merger agreement under which Politic will merge with the Company and between 75%
and 93% of the outstanding shares of Company common stock will be converted into
the right to receive $14 per share in cash. The exact percentage will be
determined by an election procedure under which the Company's stockholders can
elect to retain their shares or receive $14 per share in cash. If the
stockholders elect to retain more than 25% or less than 7% of their shares,
stockholders will be subject to proration to bring the amount of cash and stock
within these limits. The merger agreement is described in the Company's Current
Report on Form 8-K dated March 31, 2000. The merger is subject to the approval
of the holders of two-thirds of the outstanding shares of the Company at a
special meeting of stockholders which will be scheduled.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES
See Index to Consolidated Financial Statements and Supplementary Data on
page 29.
EXHIBITS FILED
Exhibits required to be filed with this Annual Report on Form 10-K/A are
listed in the following Exhibit Index.
Pursuant to Rule 15d-21 promulgated under the Securities Exchange Act of 1934,
the following annual report for the Company's Employee Stock Purchase Plan will
be furnished to the Commission when the information becomes available.
Form 11-K for the Company's 401(k) Retirement Savings Plan for the year ended
December 31, 1999 is incorporated herein by reference.
FORM 8-K
The Company filed a report under Item 5, Other Events on October 5, 1999
disclosing that it expected third quarter earnings to be in the range of $.31 to
$.36 per share before special and restructuring charges. No financial
statements were filed with this 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(REGISTRANT) POLICY MANAGEMENT SYSTEMS CORPORATION
BY (SIGNATURE) /s/ Timothy V. Williams
(NAME AND TITLE) Timothy V. Williams, Executive Vice President
DATE April 24, 2000 and Chief Financial Officer
BY (SIGNATURE) /s/ Jacques E. McCormack
(NAME AND TITLE) Jacques E. McCormack, Senior Vice President,
DATE April 24, 2000 Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
BY (SIGNATURE) /s/ G. Larry Wilson
(NAME AND TITLE) G. Larry Wilson, Chairman of the Board of
Directors,
DATE April 24, 2000 President and Chief Executive Officer
BY (SIGNATURE) /s/ Alfred R. Berkeley, III
(NAME AND TITLE) Alfred R. Berkeley, III, Director
DATE April 20, 2000
BY (SIGNATURE) /s/ Donald W. Feddersen
(NAME AND TITLE) Donald W. Feddersen, Director
DATE April 24, 2000
BY (SIGNATURE) /s/ Dr. John M. Palms, Ph.D
(NAME AND TITLE) Dr. John M. Palms, Ph.D, Director
DATE April 20, 2000
BY (SIGNATURE) /s/ Joseph D. Sargent
(NAME AND TITLE) Joseph D. Sargent, Director
DATE April 18, 2000
BY (SIGNATURE) /s/ John P. Seibels
(NAME AND TITLE) John P. Seibels, Director
DATE April 24, 2000
BY (SIGNATURE) /s/ Richard G. Trub
(NAME AND TITLE) Richard G. Trub, Director
DATE April 24, 2000
POLICY MANAGEMENT SYSTEMS CORPORATION
EXHIBIT INDEX
Exhibit
Number
3 ARTICLES OF INCORPORATION AND BY-LAWS
.1 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)
.2 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
.1 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)
.2 Articles of Incorporation of the Company, as amended through October 13,
1994, incorporating all amendments thereto subsequent to December 31, 1993
(filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is
incorporated herein by reference)
10 MATERIAL CONTRACTS
.1 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)
.2 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)
.3 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)
.4 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)
.5 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)
.6 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)
.7 Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-Q for the quarter ended September 30,
1992, and is incorporated herein by reference)
.8 Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-Q for the quarter ended September 30,
1994, and is incorporated herein by reference)
.9 Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-K for the year ended December 31, 1994,
and is incorporated herein by reference)
.10 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)
.11 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)
.12 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)
.13 Second and Third Amendments to the Policy Management Systems Corporation
1989 Stock Option Plan (filed as Exhibits to Form 10-Q for the quarter ended
June 30, 1995, and is incorporated herein by reference)
.14 Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1995,
and is incorporated herein by reference)
.15 Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-K for year ended December 31, 1995, and
is incorporated herein by reference)
.16 Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-K for year ended December 31, 1995, and
is incorporated herein by reference)
.17 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)
.18 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)
.19. 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)
.20 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)
.21 Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1996,
and is incorporated herein by reference)
.22 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)
.23 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)
.24 Stock Option/Non-Compete Form Agreement dated January 8, 1997 for named
executive officers together with a schedule identifying particulars for each
executive officer (filed as an Exhibit to Form 10-Q for the quarter ended March
31, 1997, and is incorporated herein by reference)
.25 Form of Amendment No. 1 to the Employment Agreements with Messrs.
Morrison and Williams, together with a schedule identifying particulars for each
executive officer (filed as an Exhibit to Form 10-Q for the quarter ended June
30, 1997, and is incorporated herein by reference)
.26 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 the quarter ended September 30, 1997, and is
incorporated herein by reference)
.27 Credit Agreement dated as of August 8, 1997, among Policy Management
Systems Corporation, the Guarantors Party hereto, Bank of America National Trust
and Savings Association and the Other Financial Institution Party Hereto (filed
as an exhibit to Form 10-Q for the quarter ended September 30, 1997, and is
incorporated herein by reference)
.28 Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an exhibit to Form 10-Q for the quarter ended March 31, 1998
and is incorporated herein by reference)
.29 Policy Management Systems Corporation Restricted Stock Ownership Plan
(filed as an exhibit to Form 10-Q for the quarter ended September 30, 1998, and
is incorporated herein by reference)
.30 Form of Restricted Stock Award Agreement dated August 11, 1998 with
Messrs. Berkeley, Feddersen, Palms, Sargent, Seibels and Trub (filed as an
exhibit to Form 10-Q for the quarter ended September 30, 1998, and is
incorporated herein by reference)
.31 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, 1999, and is incorporated herein by reference.)
.32 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 the quarter ended March 31, 1999 and is incorporated
herein by reference)
.33 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 the quarter ended March 31, 1999 and is
incorporated herein by reference)
.34 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, 1999 and is
incorporated herein by reference)
.35 Stock Option/Non-Compete Form Agreement with Michael W. Risley dated May
11, 1999 (filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1999
and is incorporated herein by reference)
.36 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 the quarter ended June 30, 1999 and is incorporated
herein by reference)
.37 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
the quarter ended September 30, 1999 and is incorporated herein by reference)
.38 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.)
.39 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.)
.40 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.)
.41 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.)
.42 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.)
.43 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.)
.44 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.)
.45 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.)
21 SUBSIDIARIES OF THE REGISTRANT
.1 Filed as an exhibit to Form 10-K for the year ended December 31,
1999, and is incorporated herein by reference.
23 CONSENTS OF EXPERTS AND COUNSEL
.1 Consent of PricewaterhouseCoopers filed as an exhibit to Form 10-K
for the year ended December 31, 1999, and is incorporated herein by reference.
27 FINANCIAL DATA SCHEDULES
.1 1999 filed as an exhibit to Form 10-K for the year ended December
31, 1999, and is incorporated herein by reference. (EDGAR version only)