UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2000
Commission file number 1-10557
POLICY MANAGEMENT SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0723125
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
ONE PMSC CENTER (PO BOX TEN)
BLYTHEWOOD, SC (COLUMBIA, SC) 29016 (29202)
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (803) 333-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No.
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
35,586,038 Common shares, $.01 par value, as of May 5, 2000.
The information furnished herein reflects all adjustments which are, in the
opinion of management, necessary for the fair presentation of the results for
the periods reported. Such information should be read in conjunction with the
Company's Annual Report on Form 10-K/A for the year ended December 31, 1999.
POLICY MANAGEMENT SYSTEMS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Income for the Three
Months Ended March 31, 2000 and 1999 . . . . . . . . 3
Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999. . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income for the Three
Months Ended March 31, 2000. . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999 . . . . . 6
Notes to Consolidated Financial Statements . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . 27
Item 6. Exhibits and Reports on Form 8-K . . . . . . 27
Signatures . . . . . . . . . . . . . . . . . . . . . 28
PART I
FINANCIAL INFORMATION
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months
Ended March 31,
2000 1999
(Unaudited)
--------------
(In thousands, except
per share data)
REVENUES
Licensing . . . . . . . . . . . . . . . . . . . $ 26,300 $ 34,766
Services. . . . . . . . . . . . . . . . . . . . 122,042 125,523
--------- ---------
148,342 160,289
--------- ---------
OPERATING EXPENSES
Cost of revenues
Employee compensation and benefits. . . . . . 79,320 73,658
Computer and communications expenses. . . . . 13,651 11,929
Depreciation and amortization of property,
equipment and capitalized software costs . . 14,694 16,157
Other costs and expenses. . . . . . . . . . . 12,303 7,416
Selling, general and administrative expenses. . 28,214 25,572
Amortization of goodwill and other intangibles. 3,385 3,077
Restructuring and other charges . . . . . . . . 12,772 -
--------- ---------
164,339 137,809
--------- ---------
OPERATING (LOSS) INCOME. . . . . . . . . . . . . (15,997) 22,480
Equity in earnings of unconsolidated affiliates. 441 140
Minority interest. . . . . . . . . . . . . . . . 18 (38)
Other Income and Expenses
Investment income. . . . . . . . . . . . . . . 2,378 252
Interest expense and other charges . . . . . . (6,683) (1,493)
--------- ---------
(4,305) (1,241)
--------- ---------
(Loss) income before income taxes. . . . . . . . (19,843) 21,341
Income tax (benefit) expense . . . . . . . . . . (7,701) 7,890
--------- ---------
NET (LOSS) INCOME. . . . . . . . . . . . . . . . $(12,142) $ 13,451
========= =========
BASIC (LOSS) EARNINGS PER SHARE. . . . . . . . . $ (0.34) $ 0.37
========= =========
DILUTED (LOSS) EARNINGS PER SHARE. . . . . . . . $ (0.34) $ 0.35
========= =========
Weighted average common shares . . . . . . . . . 35,376 36,128
Weighted average common shares assuming dilution 35,376 38,336
<FN>
See accompanying notes
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
March 31, December 31,
2000 1999
-------- --------
(In thousands, except share data)
Assets
Current assets
Cash and equivalents. . . . . . . . . . . . . . . . . . . . $ 15,143 $ 17,744
Marketable securities . . . . . . . . . . . . . . . . . . . 80 89
Receivables, net of allowance for uncollectible
amounts of $11,550 ($13,000 at 1999) . . . . . . . . . . . 96,753 99,669
Accrued revenues. . . . . . . . . . . . . . . . . . . . . . 34,759 36,393
Deferred income taxes . . . . . . . . . . . . . . . . . . . 18,975 15,979
Income tax receivable . . . . . . . . . . . . . . . . . . . 11,337 9,728
Other receivable. . . . . . . . . . . . . . . . . . . . . . - 7,788
Prepaids. . . . . . . . . . . . . . . . . . . . . . . . . . 10,406 12,050
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,015 12,559
--------- ---------
Total current assets. . . . . . . . . . . . . . . . . . . 203,468 211,999
Property and equipment, at cost less accumulated
depreciation and amortization of $134,790
($132,347 at 1999). . . . . . . . . . . . . . . . . . . . . 139,547 142,867
Accrued revenues . . . . . . . . . . . . . . . . . . . . . . 16,183 16,130
Income tax receivable. . . . . . . . . . . . . . . . . . . . 4,041 4,041
Goodwill and other intangibles, net. . . . . . . . . . . . . 111,909 111,024
Capitalized software costs, net. . . . . . . . . . . . . . . 157,224 155,896
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 31,995 29,850
Investments. . . . . . . . . . . . . . . . . . . . . . . . . 8,274 13,332
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,430 21,149
--------- ---------
Total assets. . . . . . . . . . . . . . . . . . . . . . $693,071 $706,288
========= =========
Liabilities
Current liabilities
Accounts payable and accrued expenses . . . . . . . . . . . $ 43,933 $ 41,236
Current portion of long-term debt . . . . . . . . . . . . . 70,000 4,000
Income taxes payable. . . . . . . . . . . . . . . . . . . . 4,560 4,616
Unearned revenues . . . . . . . . . . . . . . . . . . . . . 24,515 20,290
Accrued restructuring and other charges . . . . . . . . . . 7,590 3,630
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,228 2,223
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . 152,826 75,995
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . 150,000 227,000
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 72,078 68,514
Accrued restructuring and other charges. . . . . . . . . . . 3,163 2,659
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,017 9,935
--------- ---------
Total liabilities. . . . . . . . . . . . . . . . . . . . 387,084 384,103
--------- ---------
Minority interest. . . . . . . . . . . . . . . . . . . . . . 621 624
Commitments and contingencies (Note 3)
Stockholders' equity
Special stock, $.01 par value, 5,000,000 shares authorized . - -
Common stock, $.01 par value, 75,000,000 shares authorized,
35,586,038 shares issued and outstanding
(35,585,078 at December 31, 1999) . . . . . . . . . . . . . 356 356
Additional paid-in capital . . . . . . . . . . . . . . . . . 56,826 56,695
Retained earnings. . . . . . . . . . . . . . . . . . . . . . 275,341 287,483
Accumulated other comprehensive income . . . . . . . . . . . (17,443) (12,972)
Stock employee compensation trust. . . . . . . . . . . . . . (9,714) (10,001)
--------- ---------
Total stockholders' equity . . . . . . . . . . . . . . . 305,366 321,561
--------- ---------
Total liabilities and stockholders' equity. . . . . . . $693,071 $706,288
========= =========
<FN>
See accompanying notes
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
Accumulated Stock
Additional Other Employee
Common Paid-In Retained Comprehensive Compensation
Stock Capital Earnings Income(1) Trust Total
----- ------- -------- --------- --------- --------
(Dollars in thousands)
BALANCE, DECEMBER 31, 1999 . . . . $ 356 $ 56,695 $287,483 $(12,972) $(10,001) $321,561
Comprehensive income
Net (loss) income . . . . . . . . - - (12,142) - - (12,142)
Other comprehensive income,
net of tax:
Foreign currency
translation adjustments. . . . - - - (4,471) - (4,471)
---------
Total comprehensive (loss) income. (16,613)
---------
Restricted stock returned. . . . . - - - - (95) (95)
Restricted stock forfeited . . . . - (8) - - 8 -
Restricted stock vested. . . . . . - 117 - - 374 491
Stock options exercised
(1,168 shares) . . . . . . . . . - 22 - - - 22
--------- ---------- --------- --------- --------- ---------
BALANCE, MARCH 31, 2000. . . . . . $ 356 $ 56,826 $275,341 $(17,443) $ (9,714) $305,366
========= ========== ========= ========= ========= =========
<FN>
See accompanying notes
(1) Comprehensive income for the three months ended March 31, 1999 was $11,080.
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
2000 1999
------ ------
(In thousands)
Operating Activities
Net (loss) income . . . . . . . . . . . . . . . . . . . $(12,142) $ 13,451
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . 19,988 20,403
Deferred income taxes . . . . . . . . . . . . . . . . (1,577) 1,364
Provision for uncollectible accounts. . . . . . . . . 368 (299)
Loss from disposal of property and equipment. . . . . 80 221
Gain on sale of investment in unconsolidated
Subsidiary. . . . . . . . . . . . . . . . . . . . . (2,146) -
Changes in assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . 2,548 (18,675)
Accrued revenues. . . . . . . . . . . . . . . . . . . 1,581 (15,890)
Other receivable. . . . . . . . . . . . . . . . . . . 7,788 11,279
Accounts payable and accrued expenses . . . . . . . . (2,631) (7,930)
Accrued restructuring and other charges . . . . . . . 9,672 (604)
Income taxes. . . . . . . . . . . . . . . . . . . . . (1,665) 9,521
Unearned revenues . . . . . . . . . . . . . . . . . . 4,225 4,657
Other, net. . . . . . . . . . . . . . . . . . . . . . 1,527 (10,046)
--------- ---------
Cash provided by operations. . . . . . . . . . . . 27,616 7,452
--------- ---------
Investing Activities
Acquisition of property and equipment . . . . . . . . . (4,726) (12,254)
Capitalized internal software development costs . . . . (10,298) (16,918)
Business acquisitions and investments . . . . . . . . . (5,091) (26,117)
Sale of investment in unconsolidated affiliate. . . . . 7,787 -
Other, net. . . . . . . . . . . . . . . . . . . . . . . (2,234) (393)
--------- ---------
Cash used by investing activities. . . . . . . . . (14,562) (55,682)
--------- ---------
Financing Activities
Payments on long-term debt. . . . . . . . . . . . . . . (57,000) (27,471)
Proceeds from borrowing under credit facility . . . . . 46,000 90,900
Purchase of stock for Stock Employee Compensation Trust - (10,094)
Issuance of common stock under stock option plans . . . 22 3,958
Repurchase of common stock. . . . . . . . . . . . . . . - (20,797)
Other, net. . . . . . . . . . . . . . . . . . . . . . . (4,677) 15
--------- ---------
Cash (used) provided by financing activities . . . (15,655) 36,511
--------- ---------
Net decrease in cash and equivalents . . . . . . . . . . (2,601) (11,719)
Cash and equivalents at beginning of period. . . . . . . 17,744 26,013
--------- ---------
Cash and equivalents at end of period. . . . . . . . . . $ 15,143 $ 14,294
========= =========
Supplemental Information
Interest paid . . . . . . . . . . . . . . . . . . . . . $ 4,214 $ 1,094
Income taxes refunded . . . . . . . . . . . . . . . . . (5,000) (2,834)
<FN>
See accompanying notes
POLICY MANAGEMENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of Policy Management Systems
Corporation (the "Company") have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission (the "SEC"). These
consolidated financial statements include estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities and the amounts of revenues and expenses. Actual results may
differ from those estimated. In the opinion of management, these statements
include all adjustments necessary for a fair presentation of the results of all
interim periods reported herein. All adjustments are of a normal recurring
nature unless otherwise disclosed. Certain information and footnote disclosures
prepared in accordance with generally accepted accounting principles either have
been condensed or omitted pursuant to SEC rules and regulations. However,
management believes that the disclosures made are adequate for a fair
presentation of results of operations, financial position and cash flows. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and accompanying notes included in the
Company's latest annual report on Form 10-K/A.
BASIC AND DILUTED EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") are calculated according to
the provisions of Statement of Financial Accounting Standards No. 128, "Earnings
Per Share". For the Company, the numerator is the same for the calculation of
both basic and diluted EPS. For the period ended March 31, 2000, the
denominator for basic and diluted EPS is the same for two reasons. First, the
net loss generated in the period would cause the inclusion of common stock
options to be anti-dilutive. Second, the average market price of the stock for
the period was below the exercise price for all options outstanding during the
period. The following is a reconciliation of the denominator used in the EPS
calculations (in thousands):
Three Months
Ended March 31,
-----------------
2000 1999
----- -----
Weighted Average Shares
- -------------------------
Basic EPS. . . . . . . . . . . 35,376 36,128
Effect of common stock options - 2,208
------ ------
Diluted EPS. . . . . . . . . . 35,376 38,336
====== ======
For the period ending March 31, 1999, options to purchase 2,776 and 1,388
shares of common stock at $42.78 and $45.56 per share, respectively, were
outstanding but were not included in the computation of diluted EPS for the
period ending March 31, 1999.
OTHER MATTERS
Certain prior period amounts have been reclassified to conform to current
period presentation.
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.
The acquisitions above have been recorded using the purchase method of
accounting. Accordingly, the Consolidated Statement of Operations of the Company
does not include the results of operations before the date of the acquisition.
NOTE 3. CONTINGENCIES
The Company is involved in litigation 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. The time for
filing the amended complaint has been extended until May 22, 2000.
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.
Between March 31, 2000, and May 5, 2000, four 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 actions.
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 4. SEGMENT INFORMATION
The Company's operating segments are the four revenue-producing components
of the Company for which separate financial information is produced for internal
decision making and planning purposes. The segments are as follows:
1. Property and casualty enterprise software and services (generally referred to
as "property and casualty"). This segment provides software products, product
support, professional services and outsourcing primarily to the US property and
casualty insurance market.
2. Claims and Risk Management (generally referred to as "claims"). This segment
provides software products, product support, professional services and
outsourcing primarily to the claims management function of the US insurance
industry and risk management, i.e. self-insured, marketplace. Prior to the 2000
first quarter, claims was included in the property and casualty segment.
3. Life and financial solutions enterprise software and services (generally
referred to as "life and financial solutions"). This segment provides software
products, product support, professional services and outsourcing primarily to
the US life insurance and related financial services markets.
4. International. This segment provides software products, product support,
professional services and outsourcing to the property and casualty and life
insurance markets primarily in Europe, Asia, Australia and Canada.
Prior to the 2000 first quarter, life information services and property and
casualty information services were included as segments for results included in
discontinued operations. Life information services was sold in May 1998.
Property and casualty information services was sold in August 1997.
Information about the Company's operations for the three months ended March
31, 2000 and 1999 is as follows:
Three Months
Ended March 31,
-------------------
2000 1999
------ ------
(In thousands)
REVENUES FROM EXTERNAL CUSTOMERS
Property and casualty. . . . . . $ 54,451 $ 70,824
Claims and risk management . . . 7,317 2,867
Life and financial solutions . . 47,868 41,634
-------------- ---------
Total US revenues. . . . . . . 109,636 115,325
International. . . . . . . . . . 38,706 44,964
-------------- ---------
Total revenues . . . . . . . . $ 148,342 $160,289
============== =========
OPERATING INCOME (EXPENSE)
Property and casualty. . . . . . $ 5,189 $ 19,590
Claims and risk management . . . 455 2,304
Life and financial solutions . . (4,776) 8,107
Corporate and US administrative. (12,874) (8,022)
-------------- ---------
Total US operating income. . . (12,006) 21,979
-------------- ---------
International. . . . . . . . . . (2,047) 2,280
International administrative . . (1,944) (1,779)
-------------- ---------
Total international. . . . . . (3,991) 501
-------------- ---------
Operating (loss) income. . . . (15,997) 22,480
Equity in earnings of
unconsolidated affiliates. . . 441 140
Minority interest. . . . . . . . 18 (38)
Other income and expenses. . . . (4,305) (1,241)
Income tax (benefit) expense . . (7,701) 7,890
-------------- ---------
Net (loss) income. . . . . . . $ (12,142) $ 13,451
============== =========
NOTE 5. SPECIAL CHARGES
The Company considers special charges to be unusual events or unusual
transactions related to continuing business activities.
The Company's operating results for the 2000 first quarter include pre-tax
special charges of approximately $12.7 million which are net of a $2.1 million
gain on the sale of a 20 percent interest in an unconsolidated subsidiary and a
$1.2 million recovery of a banking division receivable which was initially
reserved as a special charge in the 1999 fourth quarter. The majority of these
charges have or will be paid in cash.
Restructuring and other charges of approximately $12.8 million includes
approximately $7.6 million of severance related to the reduction in force of
approximately 6 percent or 350 employees, announced in the 2000 first quarter.
Additionally, $5.2 million is included for customer dispute and litigation costs
(see Note 3, "Contingencies").
The Company continues to recognize amortization expense related to software
products written down in the 1999 third and fourth quarters. As a reflection of
their estimated impaired status, these products are being amortized on the
revenue basis which is faster than straight-line method. Revenue based
amortization related to products written down in the 1999 third and fourth
quarters resulted in approximately $1.0 million more amortization expense in the
2000 first quarter than would have been recognized under the straight-line
method.
Selling, general and administrative expenses for the 2000 first quarter
includes approximately $1.4 million of brand expenses associated with changing
the name of the Company (see Note 6, "Subsequent Event").
Investment income includes a $2.1 million gain on the sale of a 20%
interest in an unconsolidated subsidiary, and interest expense includes $1.0
million of amortization of credit facilities fees paid in the 2000 first quarter
to amend the Company's existing credit facilities.
NOTE 6. SUBSEQUENT EVENTS
On April 28, 2000, the Company filed with the Securities and Exchange
Commission a registration statement on Form S-4 related to the proposed merger
of the Company with Politic Acquisition Corp., an affiliate of Welsh, Carson,
Anderson & Stowe. Also on April 28, 2000, the Company received a letter from
Electronic Data Systems Corporation ("EDS"), in which EDS set forth a
non-binding, preliminary proposal to acquire 100% of the outstanding common
stock of the Company for $18 to $20 per share, in cash. The board of directors
authorized the Company and its advisors to explore this proposal with EDS.
On April 28, 2000, the Company issued a news release that included EDS' letter
and filed the news release on May 1, 2000, under Rule 425. On May 15, 2000, EDS
issued a news release announcing it had withdrawn its proposal to acquire the
Company.
On May 1, 2000, the Company began doing business as Mynd Corporation ("Mynd")
following an earlier announcement of plans to change the Company's name.
Officially changing the Company's name requires a two-thirds vote of the
shareholders at a shareholder's meeting yet 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.
POLICY MANAGEMENT SYSTEMS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the consolidated financial statements and
notes thereto contained in Part I of this report on Form 10-Q and with the
Company's Annual Report on Form 10-K/A for the year ended December 31, 1999.
RESULTS OF OPERATIONS
Set forth below are certain operating items expressed as a percentage of
revenues and the percent increase (decrease) for those items between the periods
presented:
2000 vs. 1999
Percent
Percentage of Revenues Increase (Decrease)
------------------------ -------------------
Three Three
Months Ended Months
March 31, Ended
------------
2000 1999 March 31
----- ----- --------------
Revenues
Licensing . . . . . . . . . . . . . 17.7% 21.7% (24)%
Services. . . . . . . . . . . . . . 82.3 78.3 (3)
------ ------
100.0 100.0 (7)
------ ------
Operating expenses
Cost of revenues
Employee compensation and benefits 53.5 46.0 8
Computer & communication expenses. 9.2 7.5 14
Depreciation & amortization
property, equipment &
capitalized software costs. . . . 9.9 10.0 (9)
Other costs & expenses . . . . . . 8.3 4.6 66
Selling, general &
administrative expenses . . . . . 19.0 16.0 10
Amortization of goodwill and
other intangibles . . . . . . . . 2.3 1.9 10
Restructuring and other charges . . 8.6 - 100
------ ------
110.8 86.0 19
------ ------
Operating (loss) income. . . . . . . (10.8) 14.0 (171)
Equity in earnings of unconsolidated
affiliates. . . . . . . . . . . . 0.3 0.1 215
Other income and expenses. . . . . . (2.9) (0.7) 247
------ ------
(Loss) income before income taxes. . (13.4) 13.4 (193)
Income tax (benefit) expense . . . . (5.2) 5.0 (198)
------ ------
Net (loss) income. . . . . . . . . . (8.2)% 8.4% (190)%
====== ======
THREE MONTH COMPARISON
REVENUES
Three Months
Ended March 31,
-----------------
Licensing 2000 1999 Change
- --------- ----- ----- ------
(Dollars in Millions)
Initial charges. . . . . . . $ 9.1 $17.5 (48)%
Monthly charges. . . . . . . 17.2 17.3 -
------ ------
$26.3 $34.8 (24)%
====== ======
Percentage of total revenues 17.7% 21.7%
------ ------
In licensing the Company's products, customers generally obligate
themselves to a non-refundable initial license charge and a monthly license fee
payable over a specified period of time, which is usually six years.
The monthly license charge entitles the customer, over the contract period, to
use the licensed product and to receive product support and enhancements.
Initial licensing
Initial license revenues decreased $8.4 million for the first quarter of
2000 compared with the first quarter of 1999, with the following increases or
decreases by business segment: property and casualty down 88% ($7.1 million);
claims down 7% ($0.2 million); life and financial solutions down 52% ($1.7
million); and international increased 18% ($0.6 million).
The emergence of the internet as a viable distribution channel between insurers,
agents, suppliers and consumers, and the resulting change in technological and
functional requirements, requires the Company to transition its products and
business models to capitalize on this market change. The company's results
reflect this transition.
Lingering customer Y2K concerns and uncertainty surrounding the Company's credit
agreements and the delayed filing of the Company's 1999 annual report had a
negative effect on initial licensing activity in the 2000 first quarter.
Furthermore, initial license charges for the first quarter of 2000 do not
include any right-to-use licenses. This compares to $6.1 million in
right-to-use licenses for the first quarter of 1999. Right-to-use licenses
represent the acquisition by certain customers of the right-to-use component of
their remaining monthly license charge obligation, if any, plus the acquisition
of a perpetual right-to-use the product thereafter. Since these types of
licenses represent an acceleration of future revenues, they reduce future
monthly license charges.
First quarter 1999 initial license charges include the first license of the
Company's new workplace injury claims management tool, Claims Outcome Advisor,
which was sold in conjunction with the purchase of Legalgard.
Set forth below is a comparison of initial license revenue by segment for the
periods ending March 31, 2000 and 1999, respectively.
Three Months
Ended March 31,
-----------------
2000 1999
----- -----
(Dollars in Millions)
Property and casualty. . . . $1.0 $ 8.1
Claims . . . . . . . . . . . 2.7 2.9
Life and financial solutions 1.5 3.2
International. . . . . . . . 3.9 3.3
----- ------
$9.1 $17.5
===== ======
Percentage of total revenues 6.1% 10.9%
----- ------
Monthly licensing
Monthly license charges remained relatively unchanged for the first quarter
of 2000 compared with the first quarter of 1999 with the following increases or
decreases by business segment: property and casualty down 15% ($1.1 million)
reflecting the impact of right-to-use licenses in prior years; claims increased
to $1.5 million; life and financial solutions remained relatively unchanged; and
international down 9% ($0.5 million).
Set forth below is a comparison of monthly licensing revenue by segment for
the periods ending March 31, 2000 and 1999, respectively.
Three Months
Ended March 31,
-----------------
2000 1999
----- -----
(Dollars in Millions)
Property and casualty. . . . $ 6.4 $ 7.5
Claims . . . . . . . . . . . 1.5 -
Life and financial solutions 5.0 5.0
International. . . . . . . . 4.3 4.8
------ ------
$17.2 $17.3
====== ======
Percentage of total revenues 11.6% 10.8%
------ ------
Three Months
Ended March 31,
-----------------
Services 2000 1999 Change
- -------- ----- ----- ------
(Dollars In Millions)
Professional services & ITO. $ 97.8 $109.8 (11)%
BPO 23.1 . 15.4 51
Other. . . . . . . . . . . . 1.1 0.3 237
------------- -------
$ 122.0 $125.5 (3)%
============= =======
Percentage of total revenues 82.3% 78.3%
------------- -------
The Company's services revenue consists primarily of Professional services &
Information Technology Outsourcing ("ITO") and Business Process Outsourcing
("BPO"). Services revenue is derived from professional support services, which
include implementation and integration assistance, consulting and education
services and outsourcing services.
Professional services & ITO
Professional services & ITO revenues decreased $12.0 million for the first
quarter of 2000 compared with the first quarter of 1999, with the following
increases or decreases by business segment: property and casualty down 22%
($9.4 million); claims up $3.2 million; life insurance and financial solutions
up 7% ($1.9 million); and international down 21% ($7.7 million). The decreases
are principally due to weak initial licensing activity during 1999. The increase
in claims is primarily due to the Company's 1999 acquisitions. The 1999 first
quarter revenues include $1.6 million for professional services rendered and
received in connection with the settlement of a dispute with a customer who has
terminated its relationship with the Company. Amounts paid by the Company in
connection with the resolution of this dispute were covered by insurance and
existing legal reserves and had no impact on the Company's operating results.
Set forth below is a comparison of professional services & ITO revenue by
segment for the periods ending March 31, 2000 and 1999, respectively.
Three Months
Ended March 31,
-----------------
2000 1999
----- -----
(Dollars in Millions)
Property and casualty. . . . $34.2 $ 43.6
Claims . . . . . . . . . . . 3.2 -
Life and financial solutions 31.5 29.6
International. . . . . . . . 28.9 36.6
------ -------
$97.8 $109.8
====== =======
Percentage of total revenues 65.9% 68.5%
------ -------
BPO
BPO revenues increased $7.7 million for the first quarter of 2000 compared
with the first quarter of 1999, with the following increases by business
segment: property and casualty up 5% ($0.6 million); life insurance and
financial solutions up 157% ($6.0 million) due to internal growth and the
acquisition of FAS ($2.3 million); and international up $1.1 million.
Set forth below is a comparison of BPO revenue by segment for the periods ending
March 31, 2000 and 1999, respectively.
Three Months
Ended March 31,
-----------------
2000 1999
----- -----
(Dollars in Millions)
Property and casualty. . . . $11.9 $11.3
Claims . . . . . . . . . . . - -
Life and financial solutions 9.8 3.8
International. . . . . . . . 1.4 .3
------ ------
$23.1 $15.4
====== ======
Percentage of total revenues 15.6% 9.6%
------ ------
OPERATING EXPENSES
COST OF REVENUES
Employee compensation and benefits increased 8% for the first quarter of
2000 compared with the first quarter of 1999, due primarily to acquisitions in
1999 (see Note 2 of Notes to Consolidated Financial Statements). Before the
effect of 1999 acquisitions, employee compensation and benefits for the first
quarter of 2000 remained relatively unchanged when compared with the first
quarter of 1999 with reductions in force being offset by growth in BPO.
Compensation and benefits increased 14% ($7.0 million) domestically and
decreased 6% ($1.4 million) internationally.
Computer and communications expenses increased 14% for the first quarter of
2000 compared with the first quarter of 1999 due to the Company's 1999
acquisitions, an increase in processing volume and data center operating
software license fees.
Depreciation and amortization of property, equipment and capitalized
software costs decreased 9% primarily due to accelerated amortization recorded
in the 1999 third and fourth quarters, partially offset by the acquisitions of
Dorn and Legalgard. As a percentage of revenue, depreciation and amortization
remained relatively unchanged for the first quarter of 2000 compared with the
first quarter of 1999.
The Company continues to recognize amortization expense related to software
products written down in the 1999 third and fourth quarters. As a reflection of
their estimated impaired status, these products are being amortized on the
revenue basis which is faster than straight-line method. Revenue based
amortization related to products written down in the 1999 third and fourth
quarters resulted in approximately $1.0 million more amortization expense in
the 2000 first quarter than would have been recognized under the straight-line
method.
Other operating costs and expenses increased 66% for the first quarter of
2000 compared with the first quarter of 1999. This increase was due to the
Company's acquisitions in 1999 and a decrease in the amounts capitalized related
to internal software development and internal use systems partially off-set by
the recovery of approximately $1.2 million of receivables reserved in the 1999
fourth quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 10% for the first
quarter of 2000 compared with the first quarter of 1999 due largely to the
Company's 1999 acquisitions and approximately $1.4 million of brand expenses
associated with changing the name of the Company. (see Note 6 of Notes to the
Consolidated Financial Statements regarding branding).
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles increased 10% for the first
quarter of 2000 compared with the first quarter of 1999, principally due to
increased amortization related to the Company's 1999 acquisitions.
RESTRUCTURING AND OTHER CHARGES
Restructuring and other charges include approximately $7.6 million of cash
charges paid or to be paid as a result of an initiative taken by the Company in
the 2000 first quarter for a worldwide reduction in force of six percent or 350
employees. An additional $5.2 million relates to a contingent liability ($3.5
million) established pending the outcome of a dispute settlement and legal
expenses ($1.7 million) associated with the CSC and shareholder lawsuits (see
Note 3 of Notes to Consolidated Financial Statements).
OPERATING (LOSS) INCOME
The 2000 first quarter produced an operating loss of $16.0 million compared
with the 1999 first quarter operating income of $22.5 million. The 2000 first
quarter operating loss includes the banking division operating loss of $4.1
million. The 2000 first quarter operating loss includes approximately $12.7
million of unusual events or unusual transactions related to continuing business
activities described as special charges (see Note 5 of the Notes to the
Consolidated Financial Statements). Before these special charges, the 2000 first
quarter produced an operating loss of approximately $2.1 million compared with
operating income of $22.5 million in the 1999 first quarter. Also before special
charges, decreases in segment operating income were: property and casualty
decreased 58%, claims decreased 78%, life and financial solutions decreased 112%
and international decreased 487% (see discussion of "Revenues" and "Operating
Expenses" above).
A significant portion of both the Company's revenues and its operating
income is derived from initial licensing agreements received as part of the
Company's software licensing activities. Because a substantial portion of
initial licensing revenues are recorded at the time new systems are licensed,
there can be significant fluctuations from quarter to quarter in revenues and
operating income derived from licensing activities. This is attributable
principally to the timing of customers' decisions to enter into license
agreements with the Company, which the Company is unable to control.
Set forth below is a comparison of initial license revenues for the last eight
quarters expressed as a percentage of total revenues for each of the periods
presented:
2000 1999 1998
----- ---------------- ----------------------------
1st 4th 3rd 2nd 1st 4th 3rd 2nd
----- ----------------------- ---------------------
(Dollars in Millions)
Initial license revenues $9.1 $8.7 $19.2 $26.7 $17.5 $27.4 $14.7 $13.0
% of total revenues 6.1% 6.1% 11.4% 15.4% 11.0% 16.0% 9.7% 9.0%
The increasing rate of change in the insurance and banking industries
coupled with the rapid evolution of eCommerce technology and the volatility of
initial license revenues, as illustrated by the above table, is leading the
Company to consider new business models that place less emphasis on initial
license revenue and place more emphasis on transaction based revenue. The
Company expects this transition to occur gradually over the next several years
and will likely affect the amount and timing of revenue recognized in the
Company's financial statements.
OTHER INCOME AND EXPENSE
Investment income includes a $2.1 million gain on the sale of a 20%
interest in an unconsolidated subsidiary.
Interest expense increased 348% for the first quarter of 2000 compared with
the first quarter of 1999, principally due to higher levels of borrowed funds
under the Company's credit agreements and $1.0 million of amortization of credit
facilities fees paid in the 2000 first quarter to amend the Company's credit
agreements. The nominal interest rates applicable to borrowings under the
Company's credit agreements during the first quarter of 2000 ranged from 8.75 to
9.60 percent.
INCOME TAXES
The effective income tax rate (income taxes expressed as a percentage of pre-tax
income) was 38.8% and 37.0% for the first quarters of 2000 and 1999,
respectively. The effective rate for the first quarter of 2000 is higher than
the federal statutory rate principally due to the effect of state and local
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
March 31, December 31,
2000 1999
- ---------------------------------------------------------------------
(Dollars in Millions)
Cash and equivalents and marketable
securities. . . . . . . . . . . . $ 15.2 $ 17.8
Current assets. . . . . . . . . . . 203.5 212.0
Current liabilities . . . . . . . . 152.8 76.0
Working capital . . . . . . . . . . 50.7 136.0
Long-term debt. . . . . . . . . . . 150.0 227.0
Three Months Ended
March 31,
2000 1999
- ----------------------------------------------------------------------
(Dollars in Millions)
Cash provided by operations. . . . . . . . . $ 27.6 $ 7.5
Cash used by investing activities. . . . . . (14.6) (55.7)
Cash (used) provided by financing activities (15.7) 36.5
The Company's total debt, net of cash and marketable securities, at March
31, 2000 was $205.0 million, a decrease from the comparable amount ($213.0
million) at December 31, 1999. Historically, the Company has used cash from
operations for the development and acquisition of new products, capital
expenditures, acquisition of businesses and repurchases of the Company's stock.
For the first quarter of 2000, compared with the first quarter of 1999 however,
the Company significantly decreased expenditures in all these areas.
As of March 31, 2000, the Company had the following credit facilities: a $180.0
million line of credit expiring in July 2001 that had $150.0 million outstanding
and a $70.0 million term loan expiring in January 2001 that had $70.0 million
outstanding. Because of the 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 March and
April 2000 that returned 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 $125.0 million
on April 1, 2001.
The results for the quarter ended March 31, 2000, resulted in a violation of the
Leverage Ratio financial covenant of both the credit and term loan agreements as
amended. Consequently, the Company entered into an amendment in April 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, as defined, less capital
expenditures. 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 credit agreements is
dependent upon the Company achieving improvements in its operating performance.
In light of the uncertainties surrounding future performance and the Company's
current debt position, the Company, 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 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.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: Statements in this report that are not descriptions of historical facts
may be forward-looking statements that are subject to risks and uncertainties,
including economic, competitive and technological factors affecting the
Company's operations, markets, products, services and prices, as well as other
specific factors discussed above and in the Company's filings with the
Securities and Exchange Commission. These and other factors may cause actual
results to differ materially from those anticipated.
PART II
OTHER INFORMATION
POLICY MANAGEMENT SYSTEMS CORPORATION
ITEM 1. LEGAL PROCEEDINGS
See Note 3, Contingencies, of Notes to Consolidated Financial Statements,
which is incorporated by reference in this Item.
ITEMS 2, 3, 4 AND 5 are not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits
Exhibits required to be filed with this Quarterly Report on Form 10-Q are
listed in the following Exhibit Index.
Reports on Form 8-K
The Company filed a report under Item 5 Other Events on January 7, 2000,
disclosing that the Company did not expect to report earnings per share in
excess of the low teens (cents per share) for the fourth quarter. No financial
statements were filed with this 8-K.
The Company filed a report under Item 5 Other Events on March 31, 2000,
disclosing that the Company and Politic Acquisition Corp. ("Acquisition"), an
affiliate of Welsh, Carson, Anderson & Stowe, entered into an Agreement and Plan
of Merger pursuant to which Acquisition will merge into the Company.
POLICY MANAGEMENT SYSTEMS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POLICY MANAGEMENT SYSTEMS CORPORATION
-------------------------------------
(Registrant)
Date: May 15, 2000 Timothy V. Williams
Executive Vice President
(Chief Financial Officer)
POLICY MANAGEMENT SYSTEMS CORPORATION
EXHIBIT INDEX
Exhibit
- -------
Number
- ------
2. PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION
A. Agreement and Plan of Merger between Politic Acquisitions Corporation and
Policy Management Systems Corporation dated March 30, 2000 (filed as an exhibit
to Form 8-K dated March 30, 2000 and is incorporated herein by reference)
B. Amended and Restated Agreement and Plan of Merger between Politic
Acquisition Corporation and Policy Management Systems Corporation dated as of
April 27, 2000 (filed as an exhibit to Form S-4, Registration Statement, dated
April 29, 2000 and is incorporated herein by reference.
3. ARTICLES OF INCORPORATION AND BY-LAWS
A. Bylaws of the Company, as amended through September 2, 1999 incorporating
all amendments thereto subsequent to July 19, 1994 (filed as an Exhibit to Form
10-Q for the quarter ended September 30, 1999, and is incorporated herein by
reference)
B. Articles of Incorporation of the Company, as amended through October 13,
1994, incorporating all amendments thereto subsequent to December 31, 1993
(filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is
incorporated herein by reference)
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES
A. Specimen forms of certificates for Common Stock of the Company (filed as
an Exhibit to Registration Statement No. 2-74821, dated December 16, 1981, and
is incorporated herein by reference)
B. Articles of Incorporation of the Company, as amended through October 13,
1994, incorporating all amendments thereto subsequent to December 31, 1993
(filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is
incorporated herein by reference)
10. MATERIAL CONTRACTS
A. Conformed copy of Development and Marketing Agreement between
International Business Machines Corporation and Policy Management Systems
Corporation, dated July 26, 1989 (File No. 0-10175 - filed under cover of Form
SE filed on September 29, 1989, and is incorporated herein by reference)
B. Policy Management Systems Corporation 1989 Stock Option Plan (File No.
0-10175 - filed under cover of Form SE on March 22, 1991, and is incorporated
herein by reference)
C. Deferred Compensation Agreement with G. Larry Wilson (filed as an Exhibit
to Form 10-K for the year ended December 31, 1993, and is incorporated herein by
reference)
D. Employment Agreement with Stephen G. Morrison (filed as an Exhibit to
Form 10-Q for the quarter ended March 31, 1994, and is incorporated herein by
reference)
E. Stock Option/Non-Compete Agreement with Stephen G. Morrison (filed as an
Exhibit to Form 10-Q for the quarter ended March 31, 1994, and is incorporated
herein by reference)
F. Employment Agreement with Timothy V. Williams (filed as an Exhibit to
Form 10-K for the year ended December 31, 1994, and is incorporated herein by
reference)
G. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1992, and
is incorporated herein by reference)
H. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1994, and
is incorporated herein by reference)
I. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is
incorporated herein by reference)
J. Policy Management Systems Corporation 1993 Long-Term Incentive Plan for
Executives (filed as an Exhibit to Form 10-K for the year ended December 31,
1994, and is incorporated herein by reference)
K. First Amendment to the Policy Management Systems Corporation 1989 Stock
Option Plan (filed as an Exhibit to Form 10-K for the year ended December 31,
1994, and is incorporated herein by reference)
L. Fourth Amendment to the Policy Management Systems Corporation 1989 Stock
Option Plan (filed as an Exhibit to Form 10-Q for the quarter ending March 31,
1995, and is incorporated herein by reference)
M. Second and Third Amendments to the Policy Management Systems Corporation
1989 Stock Option Plan (filed as an Exhibits and to Form 10-Q for the quarter
ended June 30, 1995, and is incorporated herein by reference)
N. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1995, and is
incorporated herein by reference)
O. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-K for year ended December 31, 1995, and is
incorporated herein by reference)
P. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-K for year ended December 31, 1995, and is
incorporated herein by reference)
Q. Stock Option/Non-Compete Agreement with Timothy V. Williams dated
February 1, 1994 (filed as an Exhibit to Form 10-K for year ended December 31,
1995, and is incorporated herein by reference)
R. Stock Option/Non-Compete Agreement with Timothy V. Williams dated May 10,
1995 (filed as an Exhibit to Form 10-K for year ended December 31, 1995, and is
incorporated herein by reference)
S. Registration Rights Agreement, dated March 8, 1996, between Policy
Management Systems Corporation and Continental Casualty Company (filed as an
Exhibit to Form 10-Q for the quarter ended March 31, 1996, and is incorporated
herein by reference)
T. Shareholders Agreement dated March 8, 1996 between Policy Management
Systems Corporation and Continental Casualty Company (filed as an Exhibit to
Form 10-Q for the quarter ended March 31, 1996, and is incorporated herein by
reference)
U. Stock Option/Non-Compete Form Agreement for named executive officers
together
with schedule identifying particulars for each named executive officer (filed as
an Exhibit to Form 10-Q for the quarter ended June 30, 1996, and is incorporated
herein by reference)
V. Employment Agreement Form dated November 7, 1996 for Messrs.
Morrison and Williams together with a schedule identifying particulars for each
executive officer (filed as an Exhibit to Form 10-K for year ended December 31,
1996 and is incorporated herein by reference)
W. Stock Option/Non-Compete Agreement with Stephen G. Morrison dated
October 22, 1996 (filed as an Exhibit to Form 10-K for year ended December 31,
1996 and is incorporated herein by reference)
X. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each executive officer (filed
as an Exhibit to Form 10-Q for the quarter ended March 31, 1997 and is
incorporated herein by reference)
Y. Form of Amendment No. 1 to the Employment Agreements with Messrs.
Morrison and Williams, together with schedule identifying particulars for each
executive officer (filed as an Exhibit to Form 10-Q for Quarter ended June 30,
1997 and is incorporated herein by reference)
Z. Form of Employment Agreements with Messrs. Wilson and Bailey,
together with schedule identifying particulars for each executive officer (filed
as an Exhibit to Form 10-Q for Quarter ending September 30, 1997 and is
incorporated herein by reference)
AA. Credit Agreement dated as of August 8, 1997 among Policy Management
Systems Corporation, the Guarantors Party hereto, Bank of America National Trust
and Savings Association and the Other Financial Institution Party Hereto (filed
as an Exhibit to Form 10-Q for Quarter ending September 30, 1997 and is
incorporated herein by reference)
BB. Stock Option/Non-Compete Form Agreement for named executive
officers together with schedule identifying particulars for each named executive
officer (filed as an Exhibit to the Form 10-Q for the quarter ended March 31,
1998, and is incorporated herein by reference)
CC. Policy Management Systems Corporation Restricted Stock Ownership
Plan (filed as an Exhibit to Form 10-Q for Quarter ended September 30, 1998 and
is incorporated herein by reference)
DD. Form of Restricted Stock Award Agreement dated August 11, 1998 with
Messrs. Berkeley, Feddersen, Palms, Sargent, Seibels and Trub (filed as an
Exhibit to Form 10-Q for Quarter ended September 30, 1998 and is incorporated
herein by reference)
EE. Employment Agreement with Michael W. Risley dated February 23,
1999, effective November 10, 1998 (filed as an Exhibit to Form 10-K for the year
ended December 31, 1998 and is incorporated herein by reference)
FF. Form of Restricted Stock Award Agreement dated March 1, 1999 with
Messrs. Berkeley, Feddersen, Palms, Sargent, Seibels and Trub (filed as an
Exhibit to Form 10-Q for Quarter ending March 31, 1999 and is incorporated
herein by reference)
GG. Form of Restricted Stock Award Agreement for named executive
officers together with schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-Q for Quarter ending March 31, 1999 and
is incorporated herein by reference)
HH. Stock Option/Non-Compete Form Agreement for named executive
officers together with schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-Q for Quarter ending June 30, 1999 and
is incorporated herein by reference)
II. Stock Option/Non-Compete Form Agreement with Michael W. Risley
dated May 11, 1999 (filed as an Exhibit to Form 10-Q for Quarter ending June 30,
1999 and is incorporated herein by reference)
JJ. Form of 1999 Bonus Plan for named executive officers together with
schedule identifying particulars for each named executive officer (filed as an
Exhibit to Form 10-Q for Quarter ending June 30, 1999 and is incorporated herein
by reference)
KK. Promissory Note dated July 21, 1999 between Policy Management
Systems Corporation and First Union National Bank (filed as an Exhibit to Form
10-Q for Quarter ending September 30, 1999 and is incorporated herein by
reference)
LL. Modification Number One dated October 15, 1999 to the Promissory
Note between Policy Management Systems Corporation and First Union National Bank
dated July 21, 1999 (filed as an exhibit to Form 10-K for the year ended
December 31, 1999 and is incorporated herein by reference)
MM. Modification Number Two dated October 28, 1999 to the Promissory
Note between Policy Management Systems Corporation and First Union National Bank
dated July 21, 1999 (filed as an exhibit to Form 10-K for the year ended
December 31, 1999 and is incorporated herein by reference)
NN. Stock Option/Non-Compete Form Agreement dated May 11, 1999 for
named executive officers together with schedule identifying particulars for each
named executive officer (filed as an exhibit to Form 10-K for the year ended
December 31, 1999 and is incorporated herein by reference)
OO. Stock Option/Non-Compete Form Agreement dated August 9, 1999 with
Mr. Harald J. Karlsen (filed as an exhibit to Form 10-K for the year ended
December 31, 1999 and is incorporated herein by reference)
PP. Stock Option/Non-Compete Form Agreement dated November 8, 1999 for
named executive officers together with schedule identifying particulars for each
named executive officer (filed as an exhibit to Form 10-K for the year ended
December 31, 1999 and is incorporated herein by reference)
QQ. Form of Restricted Stock Award Agreement dated February, 1999 for
Mr. Michael D. Gantt
(filed as an exhibit to Form 10-K for the year ended December 31, 1999
and is incorporated herein by reference)
RR. Change in Control Severance Pay Plan for Select Employees dated
October 22, 1996 together with schedule identifying particulars for Michael D.
Gantt and Harald J. Karlsen (filed as an exhibit to Form 10-K for the year
ended December 31, 1999 and is incorporated herein by reference)
SS. Term Loan Agreement between Policy Management Systems Corporation,
the Guarantors Party, Bank of America, N.A. and other financial institutions in
the amount of $70 million dated November 5, 1999 (filed as an exhibit to Form
10-K for the year ended December 31, 1999 and is incorporated herein by
reference)
TT. Form of Restricted Stock Award Agreement dated March 1, 2000 with
Messrs. Berkeley, Feddersen, Palms, Sargent and Trub with schedule
Identifying particulars for each named director (filed herewith)
The Schedule for TT contained the following:
Named Director Number Granted
--------------- ---------------
Al Berkeley 1,491
Don Feddersen 1,491
John Palms 1,491
Joe Sargent 1,491
Richard Trub 1,491
UU. First Amendment to the Credit Agreement dated as of November 5,
1999, between Policy Management Systems Corporation, Bank of America, N.A. and
the other financial institutions thereto (filed herewith)
VV. Second Amendment to the Credit Agreement dated as of February 10,
2000 between Policy Management Systems Corporation, Bank of America, N.A. and
the other financial institutions thereto (filed herewith)
WW. Third Amendment to the Credit Agreement dated as of March 30, 2000
between Policy Management Systems Corporation, Bank of America, N.A. and the
other financial institutions thereto (filed herewith)
XX. Fourth Amendment to the Credit Agreement dated as of April 24, 2000
between Policy Management Systems Corporation, Bank of America, N.A. and the
other financial institutions thereto (filed herewith)
YY. First Amendment to Term Loan Agreement dated as of February 10,
2000 between Policy Management Systems Corporation, Bank of America, N.A. and
the other financial institutions thereto (filed herewith)
ZZ. Second Amendment to Term Loan Agreement dated as of March 30, 2000
between Policy Management Systems Corporation, Bank of America, N.A. and the
other financial institutions thereto (filed herewith)
AAA. Third Amendment to Term Loan Agreement dated as of April 24, 2000
between Policy Management Systems Corporation, Bank of America, N.A. and the
other financial institutions thereto (filed herewith)
BBB. Security Agreement dated as of April 28, 2000, among Policy
Management Systems Corporation, certain of its subsidiaries, and Bank of
America, N.A., as Administrative Agent (filed herewith)
CCC. Pledge Agreement dated as of April 28, 2000, between Policy
Management Systems Corporation, certain of its subsidiaries, and Bank of
America, N.A., as Administrative Agent (filed herewith)
DDD. Mortgage Agreement dated as of April 28, 2000, between Policy
Management Systems Corporation and Bank of America, N.A., as Administrative
Agent (filed herewith)
27. FINANCIAL DATA SCHEDULE
A. Filed herewith