1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993 Commission file number 0-10175
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 PMS Center (P.O. Box Ten)
Blythewood, S.C. (Columbia, S.C.) 29016 (29202)
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803)735-4000
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 X
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 $797,531,112 at March 11, 1994 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 March 11, 1994 was 22,637,021.
DOCUMENTS INCORPORATED BY REFERENCE
Item 4 of Registrant's Report on Form 8-K, dated August 17, 1993, is
incorporated by reference in Part II.
2
PART I
ITEM 1. BUSINESS
THE COMPANY
ORGANIZATION AND GENERAL DEVELOPMENT
Policy Management Systems Corporation ("Company"), a leading
provider of standardized insurance software systems and automation,
administration and information services to the insurance industry,
is a South Carolina corporation incorporated in 1980. At December
31, 1993, the Company had 4,350 full-time employees and 4,786 total
employees located in offices in North America, Europe and
Australia.
Prior to 1985, the Company operated primarily as a provider of
insurance software systems and related automation support services
to property and casualty insurance companies. Since that time the
Company has broadened its software product and services offerings
through the introduction of new internally developed products and
services and business and software product acquisitions.
During 1985, the Company initiated an expansion into the
property and casualty information services business to assist
underwriters and claims professionals in the property and casualty
insurance marketplace. The Company began to acquire regional
providers of information services to provide the capability of
gathering and electronically communicating information from all
states and regions. By the end of 1986, the Company had completed
acquisitions, which provided for national coverage for Motor
Vehicle Reports and Personal Lines inspections. By November 1988,
the Company had completed acquisitions, which provided for national
coverage for Premium Audits and Commercial Line Inspections.
Through its nationwide information gathering network, the
Company provides the property and casualty insurance industry with
the information to assist insurers in making more informed
decisions on risk selection, pricing and claims adjusting. Most of
these services are provided on an automated basis to allow the
consistent application of underwriting standards and rules.
2
3
From 1990 through 1993, the Company acquired businesses which
provide information services related to hospital medical records,
attending physician statements and personal history interviews
primarily for the life and health insurance industry. Since then,
the Company has expanded its operations and information services
offerings to the point that it now offers a wide range of
information services and related data base products to the property
and casualty, life and health insurance markets.
Between 1986 and 1989, the Company, through business
acquisitions, took its initial steps toward becoming a major
supplier of automation solutions for the life and health insurance
markets. Since then, the Company has continued to expand its
products and services offerings and in August 1993, acquired
CYBERTEK Corporation ("CYBERTEK") of Dallas, Texas. CYBERTEK is a
leading provider of information management systems and processing
solutions designed to meet the needs of the life insurance and
financial services industries. The Company is currently enhancing
and integrating the business functions of CYBERTEK products with
certain of the Company's Series III industry applications and its
Integrated Application Platform architecture. The Company expects
this effort to continue through 1996 with the anticipated initial
release of the integrated applications being made generally
available in late 1994 or early 1995 with subsequent releases to
follow. CYBERTEK has a customer base of over 100 companies.
In 1987, the Company began to place more emphasis on the
processing services market for both the private and public sectors,
and today provides a full range of outsourcing services. These
services can range from processing a single line of business to
assuming responsibility for complete systems maintenance,
facilities management and processing and administration support of
an insurance company's business. The Company provides outsourcing
services from data centers located in North America, Europe and
Australia.
During the early stages of the Company's development, a major
portion of the Company's revenues were derived from systems
licensing activities (43.7% in 1985). As the Company has continued
to enhance its position as a provider of a full range of business
solutions, based upon automation, administration support and
information, to the insurance industry, the portion of the
Company's revenues derived from systems licensing activities has
steadily declined, representing 16.5% of total revenues in 1993.
The remainder of the Company's revenues are derived primarily from
automation, administration and information services activities.
3
4
The Company's strategy is to build a larger base of recurring
systems licensing and services revenues. As a result of this
emphasis, initial license charges, that portion of license charges
from systems licensing activities which is generally recognized as
revenue upon execution of a license obligation and delivery of the
product, have continually declined, representing 5.8% of total
revenues in 1993, compared to 16.4% in 1985.
RECENT DEVELOPMENTS
In February 1994, the Company's independent accountants
completed a special audit of the Company's financial statements as
of and for the six months ended June 30, 1993. As a result of that
audit, certain of the Company's financial statements were restated.
See Note 2 of Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations. Coopers & Lybrand has been engaged to
perform an audit of the Company's 1992 financial statements, and
Ernst & Young has agreed to perform procedures to determine whether
it can reissue its audit reports on the 1990 and 1991 financial
statements.
SEGMENT INFORMATION
The Company operates in one business segment, the providing of
computer software systems and automation and administration support
and information services to the insurance industry.
The majority of the Company's revenues are generated from
products and services provided in the United States and no one
customer accounted for more than 10% of revenues during the year
ended December 31, 1993. The following table illustrates the
relative percentages of total revenue represented by the Company's
products and services in the United States and foreign countries
for 1993.
Percent of
Revenue
Year ended
December 31,
1993
United States................. 87.1%
Canada........................ 4.3%
Europe........................ 5.5%
Asia.......................... 3.1%
4
5
PRODUCTS AND SERVICES
The Company offers over 135 business solutions, which include
more than 90 application software systems and a wide range of
outsourcing, professional and information services, designed to
meet the needs of the property and casualty, life and health
insurance markets.
The Company's primary software systems currently run on mid-
range and large scale IBM computers or IBM compatible equipment
utilizing most IBM operating systems. In addition, a number of
systems run on intelligent workstations.
Most customers licensing the Company's software systems also
use the Company's professional services, which are normally
provided under separate agreements. Customers using the Company's
information services do not necessarily license the Company's
software products. Over 100 customers currently utilize the
Company's various outsourcing services, which are provided under
contracts having terms up to fifteen years.
The Company obtains from third parties licenses for a wide
range of software products and services which are used in varying
degrees in developing and enhancing the Company's products and in
performing services for its customers. Such products range from
mainframe operating systems to graphical user interfaces. Although
such products licensed from third parties are important to the
products and services offered by the Company, there is generally no
single product licensed from a third party without which the
Company's development of its products and performing of its
services could not continue.
SOFTWARE PRODUCTS
The Company's software products automate most insurance
processing functions, including various underwriting, claims
accounting, financial and regulatory reporting and cash management
functions. The systems have been designed with the intent to permit
ease of use and provide flexibility in adapting them to a
particular customer's requirements and modifying them as business
conditions change. The systems are modular in structure and
facilitate the application of updates and enhancements and
interfacing and integration of the different systems. Most of the
systems will operate on either a stand-alone basis or in
conjunction with each other.
Series III technologies serve as a platform for the Company's
systems for the property and casualty, life and health insurance
markets. A primary objective of Series III is the full
5
6
integration of the information and data gathering, processing,
underwriting, claims handling and reporting processes for providers
of insurance to create a cooperative processing environment where
insurance professionals, using advanced intelligent workstations,
can process multiple tasks concurrently with minimal clerical
support and data entry. The foundation of Series III is the
Company's Integrated Application Platform ("IAP"), more fully
described below. Series III uses advanced and emerging
technologies such as relational data bases, graphical user
interfaces and imaging. Series III technologies allow system
upgrades, additions and interfaces to be implemented much quicker
and at reduced costs, with a minimum of disruption to ongoing
operations. Using relational data bases and cooperative
processing between hardware platforms and allowing access to data
from multiple sources through advanced networks, Series III is
intended to provide a seamless flow of information between
insurance agents, branch offices and the home office of insurance
companies.
The Company relies upon contract, intellectual property,
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 secret and proprietary
information to third parties without the consent of the Company and
generally restrict their use of the Company's products to only
their operations. The Company also informs its employees of the
proprietary nature of its products and obtains from them an
agreement not to disclose proprietary information. Notwithstanding
those restrictions, it may be possible for competitors of the
Company to obtain unauthorized access to the Company's proprietary
information. The Company also has registered service marks or
pending applications for registration for many of its software
products.
The following is a detailed description of current principal
software products:
POLICY MANAGEMENT SYSTEM ("PMS") - PMS, the Company's most
comprehensive and widely used mainframe system, performs the
functions essential to all phases of the management of property and
casualty insurance policies. This system, which supports business
written by property and casualty insurance companies, is designed
to reduce paper work dependency, facilitate rapid access to
information and improve service. Principal automated functions
performed by PMS are policy rating and premium calculation, policy
printing, renewal and endorsement generation and certain
reinsurance processing.
6
7
POINT - An integrated midrange property and casualty
processing system designed to run on IBM's AS/400 computer,
providing the basic system functions (including policy, claims,
financial and reinsurance management and reporting) used by
property and casualty insurance companies with annual direct
written premiums of up to approximately $150 million.
BILLING AND COLLECTION MANAGEMENT SYSTEM ("BCMS") - An on-
line system that automates management of property and casualty
insurance billing and collections for single, consolidated, third
party, agency, and account current disciplines. Personal and
commercial lines are supported and may be collected and paid
through on-line cash entry, lockbox, optical character readers
(OCR), or electronic funds transfer (EFT) methods. The system
features user defined pay plans, finance and service charges and
delinquency plans and supports payroll deduction plans.
BILLING AND COLLECTION WORKSTATION ("BCWS") - Client/server
solution that automates the management of billing and collections
for property and casualty, individual life and health, and group
life and health lines of business. Multiple billing disciplines
(including single policy, account bill, third party, agency, and
account current) and collection methods (including cash entry,
lockbox, OCR, EFT, and credit card) are designed to offer enhanced
flexibility to the user.
INSURANCE MANAGEMENT INFORMATION SYSTEM ("IMIS") - A
management information and reporting system that provides premium,
loss experience, reinsurance and actuarial reporting to satisfy
insurance company management and statutory reporting requirements
for property and casualty insurance companies.
MANAGEMENT INFORMATION SYSTEMS ("MIS") - A client/server
system that provides data generation and manipulation capabilities
to fulfill the management, annual statement, actuarial, bureau, and
other reporting requirements of a broad range of insurance
companies.
MANAGEMENT WORKSTATION ("MWS") - An intelligent workstation
based system designed for use in conjunction with MIS to capture
and display management information.
MANAGEMENT DECISION SUPPORT ("MDS") - Workstation tool that
provides insurance professionals with the capability to design and
run queries against information contained in relational databases
and allows on-line access to current and historical versions of
various standard reports.
7
8
MICRO MAINFRAME SYSTEM ("MMS") - An intelligent workstation
based system designed to meet the policy processing and rating
needs of property and casualty insurance companies. MMS emulates
mainframe functions on a workstation allowing the maintenance of
software rating applications that run in either a mainframe or
workstation environment.
UNDERWRITING WORKSTATION ("UWS") - Client/server solution that
stores and manages policy information in a central location to
improve the accuracy and consistency of underwriting decisions.
Automates rate, quote, and policy issuance, eliminating the need
for manual intervention.
UNDERWRITING MANAGEMENT SYSTEM ("UMS") - An integrated system
providing the capability to store and manage policy information in
a central location to facilitate the accuracy and consistency of
underwriting decisions.
CLAIMS HANDLING SYSTEM ("CHS") - An intelligent workstation
based system which automates most claims handling related functions
of property and casualty insurance companies, including claims
payments, and facilitates the uploading and downloading of claims
information between host and remote computers.
CLAIMS WORKSTATION ("CWS") - Client/server system that
automates the claims handling processes, as well as providing
access to the various claims functions and information in a
distributed environment.
PRODUCT DEVELOPMENT SUPPORT SYSTEM ("PDSS") - Client/server
system which facilitates and expedites the development of new and
modification of existing life and health insurance products by
centralizing product rules and information into a building block
format for easy, timely access and manipulation. Once product
rules and information are input, they can be used for a number of
different products.
HEALTH ENTERPRISE SOLUTION ("HES") - A comprehensive series
of systems designed for the administration and management of most
indemnity and managed care health products. Functions supported
include point of service, capitation and a full array of other
managed care requirements. HES includes the ADMIN, and CAPS as
sub-systems.
8
9
CLAIMS ADMINISTRATION AND PAYMENT SYSTEM ("CAPS") - A claims
administration and payment system with advanced capabilities
supporting the cost management and extensive data collection needs
of most health insurers. CAPS is utilized primarily by large
health insurance companies and Blue Cross and Blue Shield
organizations.
CLAIMS ADMINISTRATION SYSTEM ("CAS II") - An on-line immediate
update claims system that supports cost management programs, such
as Preferred Provider Organizations, precertifications and second
surgical opinions for medium-sized insurance companies or self-
administered clients.
GROUP ADMINISTRATION AND BILLING SYSTEM ("ADMIN") - A group
health insurance billing and administration system which automates
and integrates membership, premium calculation, billing and
collection, receivables, arrears and information management. This
product is used primarily by large health insurance companies and
Blue Cross and Blue Shield organizations.
PROVIDER INFORMATION SYSTEMS ("PIMS") - A relational database
provider information solution that retains information on
demographics and pricing solutions in order to administer HMO and
managed care business requirements.
PMSO AUBEN-UND INNENDIENST WORKSTATION ("AIWS") - A single use
interface which allows users to support the sale of life, health,
accident, and property insurance in Europe. AIWS is an all lines
quote, offer and application system and provides agents with a
client system for acquisition data and detailed policy information.
Based on OS/2, AIWS can operate in stand-alone or local area
network environments and can communicate with administration
systems.
AGENCY WORKSTATION-THE BUNDLE ("AWS") - A micro-based agency
system that provides personal and commercial lines rating, flood
rating, marketing functions and access to Motor Vehicle Reports.
ADVANCED COMMUNICATIONS ACCESS ("ACA") - A Series II genesis
bridge between application systems that interfaces IBM mainframe-
based company systems with mini- and micro-based systems. ACA
provides communications, data translation, and routing
capabilities, and supports ACORD and SCIO standards for several
lines of business.
PRIVATE LIFE INSURANCE SYSTEM ("PLIS") - European automatic
user-controlled computer system for processing of individual life
insurance policies which covers all functions in the production of
Individual Life Insurance and Pension Plans including: signing of
new policies, policy endorsements, reimbursements, premium
payments, simulation and statistics and case processing.
AUTOMATED INFORMATION SYSTEM ("AIS") - An integrated
information order, delivery, evaluation, and management platform
featuring a mainframe database that can be accessed by terminals or
intelligent workstations via cooperative processing. AIS allows
9
10
users to access information designed to facilitate the insurance
underwriting and claims settlement process from multiple vendors.
CLIENT INFORMATION SYSTEM ("CIS") - DB/2-based mainframe
system which serves as a common repository of information relating
to an insurance company's clients and provides an index to other
corporate data. CIS bridges computer systems, regardless of the
software product and vendor, and displays various business
relationships that exist between the client and the insurance
company.
CLIENT INFORMATION WORKSTATION ("CIWS") - Client/server
solution that automates the management of information about a
person, company, prospect or provider who has a relationship with
an insurance company.
WORK IN PROCESS ("WIP") - WIP facilitates the management,
including tracking, assigning, reassigning and controlling, of
various tasks generated in an insurance company environment.
CORPORATE INVESTMENT MANAGEMENT SYSTEMS ("CIMS") - A series of
investment systems designed for managing complex investment
portfolios which handles most types of securities and includes
portfolio segmentation, asset valuation and complete accounting
control capabilities. These systems, which will operate on a
stand-alone basis or in conjunction with each other, may be used by
all types of insurance companies.
FINANCIAL MANAGEMENT SYSTEM ("FMS") - An integrated
accounting and financial reporting system which includes general
ledger and budgeting capabilities, distribution of income and
expense data by categories and the preparation of a variety of
financial and accounting reports.
INTEGRATED APPLICATION PLATFORM ("IAP") - A technical
platform which, using cooperative processing technologies, provides
the capability to develop applications and link software systems,
whether they be those of the Company or another party. Includes
data models, process models and other Series III architecture
foundations.
CK4/VS - An advanced administration system that provides
real-time processing for advanced or traditional life, annuity and
health insurance products. CK4/VS' exclusive Product Line
Architecture allows the user to define unique, competitive products
without costly modifications. CK4/VS offers fast product
introduction, increased productivity and strong agent and
policyholder service because of its real-time processing and
communication structure.
10
11
CK4 WORKSTATION ADVISOR - Allows the Personal Computer (PC) to
be utilized to provide an intelligent administrative workstation
for mainframe and client/server based applications. CK4
Workstation Advisor acts as a PC-based "front-end" to mainframe-
based applications with pre-programmed transactions, on-line user
documentation and function help at the data element level. A
scripting facility allows business processes to be re-engineered to
improve productivity and enhance customer service.
CK4 PLAN ADVISOR - A PC-based system which utilizes expert
system technology to provide an efficient method of designing,
developing and introducing new products. CK4 Plan Advisor creates
reference files and related user table entries required to support
a new plan or to convert an existing plan to CK4/VS. CK4 Plan
Advisor eliminates the need for extensive insurance systems
knowledge normally required to establish the files and tables by
asking a series of easy to understand questions, leading the user
through a selection process of the required plan specifics, table
updates and premium rates.
SALESPRO - An integrated sales illustration system used by
agents, which produces advanced sales illustrations for products
like universal life, variable universal life, interest sensitive
life, whole life and annuities. Options for split dollar,
comparisons, executive bonus plans, and deferred compensation are
also available.
ELECTRONIC POLICY ISSUE - Takes data compiled in the SalesPro
proposal and transmits it to the home office. This system provides
the customer with the option of handling the entire issuing
process, including printing the application and policy form, or,
simply transmitting the policy to the home office mainframe for
review and approval.
FIELD LINK - Provides communications and data linkage to
connect their remote sales force with home office databases. Field
Link expedites policy issue and delivery by making up-to-the-minute
information available to both the agent and the home office via the
agent's PC. Policy data may be held solely at the mainframe, or
may be down-loaded to a database at the PC that contains selected
policy data. Queries may then be directed to either the PC
database or the mainframe, as needed.
CK4 DOCUMENT MANAGER - Is designed to utilize PCs with a Local
Area Network (LAN) within a company to provide efficient document
management software for incoming and outgoing faxes and scanned
documents within a company. Instead of information arriving on a
fax machine, a PC-based fax server accepts incoming faxes
electronically and routes or distributes the documents to users
both internally or externally. Additionally, CK4 Document Manager
11
12
accommodates the integration of electronic mail and scanned
documents to provide a comprehensive document management system.
CYBERSCRIBE V - An automated correspondence system for the PC
that can draw policy or client information from databases. The
clients' existing word processing package is then used to create
letter text which CYBERSCRIBE V merges with the database
information.
MICRO TO MAINFRAME COMMUNICATION ARCHITECTURE (MMCA) -
Provides the telecommunications framework that allows connectivity
from PCs to host mainframe computers, with no changes to
applications programs, in a variety of environments. MMCA is a
connectivity tool that gives a system the flexibility to adapt to
new data communications hardware and software.
NEW BUSINESS EXPEDITOR - Integrates several existing systems
to automate the processing of a new policy application, including
the initial sales proposal, policy submission, underwriting,
information gathering, and final policy issuance. New Business
Expeditor integrates with CK4/VS and other individual life
insurance administrative systems.
CK4 UNDERWRITING ADVISOR - Uses the COGENSYS Judgment
Processor combined with Auto/Issue and an application entry
component to automate the underwriting process. The Judgment
Processor uses case-based reasoning to make decisions according to
the parameters taught to the system by an experienced life
insurance underwriter.
CK4 INFORMATION EXPEDITOR - Uses electronic data interchange
to manage the information coming into the home office from third
party information providers. Reports from information providers
such as blood test results and inspection reports are receipted and
matched with the application file electronically.
COGENSYS SOFTWARE:
THE JUDGMENT PROCESSOR - A software system designed to emulate
the decision-making logic of an effective human expert within
a specific area of intellectual activity. The Judgment
Processor "learns" the logic of its mentor by observing real
examples of the mentor's decision making process as the mentor
continues to work at day-to-day tasks.
THE INFORMATION MANAGER - A front-end system with the ability
to create and manipulate electronic versions of forms which
are used in conjunction with the Judgment Processor. It lets
the expert (mentor) define data entry forms, calculations,
report generation functions and data communications with
12
13
minimal assistance from a programmer. It includes a flexible
text analysis and evaluation system that allows the
translation of free-form textual data into a computer-
recognizable, pre-defined format. The system is flexible and
multilingual. It provides an automatic interface between
spreadsheets and existing microcomputer and mainframe
databases within a customer's institution.
THE APPLICATION MANAGER - A scheduling and tracking system
that manages the activities of the Judgment Processor and
Information Manager. It integrates the entire COGENSYS
Judgment Software line of products and provides query and
management reports of the entire process.
13
14
SERVICES
The following is a description of the Company's principal
services offerings:
OUTSOURCING SERVICES - The Company offers comprehensive
outsourcing services from its data centers located in North
America, Europe and Australia. These services range from providing
processing capabilities for unique, highly regulated lines of
business such as Massachusetts automobile, Texas personal lines and
automobile assigned risk plans; to providing complete processing
capabilities for all or most of a customer's business by 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, including
complete policyholder services and claims support.
INFORMATION SERVICES - The Company offers a wide range of
information services which are packaged to facilitate efficient
review and use and may be ordered and received on an automated
basis through the Company's nationwide telecommunications network
using the Company's database products. These information services,
which are designed to assist insurance professionals in making
better decisions about risk selection, pricing and claims
settlement, currently include motor vehicle reports (driving
record), undisclosed driver information, driver mileage
verification, claims histories, credit reports and histories,
property inspection and valuation reports, property claims
estimating, premium audits, physician reports and medical
histories.
PROFESSIONAL SERVICES - In addition to the services described
above, the Company offers a full range of professional services to
assist customers in attaining the most effective use of their
systems. These services include systems implementation and
integration assistance, consulting, education and project planning.
14
15
MARKETING AND CUSTOMERS
The Company markets its products and services to several
thousand property and casualty insurance companies, life insurance
companies and health insurance organizations and independent agents
and adjusters. In addition, the Company offers its software
products and automation and administration support services in 24
foreign countries. At December 31, 1993, the Company was
providing its information services to more than 9,000 insurance
companies, agents and adjusters and had a total of over 3,000
software systems licenses in force.
The Company markets its products and services through a staff
of approximately 200 employees, including salesmen and marketing
support personnel, most of whom are specialists in the insurance
industry and data processing. The Company's marketing force works
extensively with each prospective customer, analyzing its specific
requirements. Consequently, this process may extend over several
months for a prospective customer looking for a major automation,
administration support or information solution.
In addition to its own software products, the Company markets
certain software products of other parties to its customers.
Typically, these products are designed to perform noninsurance
functions or to improve the control and productivity of computer
resources.
15
16
LICENSING
The Company's revenues are generated primarily by licensing to
customers standardized insurance software systems and providing
automation, administrative and information services to the
insurance industry.
Software systems are licensed under the terms of substantially
standard nonexclusive and nontransferable license 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 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 any
additions or modifications 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. Services availability
allows customers access to professional services, other than
maintenance and enhancements, which are provided under separate
arrangements during the MESA term.
The Company provides professional support services, including
systems implementation and integration assistance and consulting
and educational services, which are available under services
agreements and charged for separately. These services are
generally provided under time and material contracts and in some
circumstances under fixed price arrangements.
The Company also offers information and outsourcing services
ranging from making available software licensed from the Company on
a remote processing basis from the Company's data centers, to
automated information services through the Company's North America
telecommunications network using the Company's database products.
Outsourcing services are typically provided under contracts having
terms from three to ten years.
16
17
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 comprehensive insurance
software systems and automation and administration support and
information services to the insurance industry. Insurers which
internally develop systems similar to those of the Company, along
with their affiliates, are not likely to become major customers of
the Company for software. There are also a number of independent
companies who offer software systems which perform certain, but not
all of the functions performed by the Company's systems.
There are a number of larger companies, including computer
manufacturers, computer service and software companies and
insurance companies, that have greater financial resources than the
Company and the technological ability to develop software products
similar to those offered by the Company. There are also a number
of companies that provide information services similar to those
provided by the Company to the insurance industry. These
companies, especially the larger ones, present a significant
competitive challenge to the Company's information services
business.
The Company competes on the basis of its service, price,
system functionality and technological advances. However, the
Company believes that the most important considerations for
potential consumers of its products and services are product
capability, ease of installation and use, reliability and quality
of technical support, documentation and training, integration of
the products and services capabilities and the experience and
financial resources of the Company.
17
18
PRODUCT DEVELOPMENT
The history of the computer software and services industry has
seen rapid changes in hardware and software technology. These
changes require the Company periodically to modify and enhance its
product offerings in an effort to accommodate changes to, and to
insure compatibility with, the latest hardware and software used by
its customers. The Company continues to upgrade its products and
add new features to meet the changing needs of its customers.
An example of the Company's continuing product development
efforts to ensure that it is in a position to meet the growing
automation needs of the insurance industry is the Company's new
generation of systems, Series III (see Products and Services,
Software Products). The Company's efforts on Series III development
have been further enhanced by IBM, pursuant to the Development and
Marketing Agreement between the Company and IBM, providing the
Company with certain machines, programs and services to assist in
the continuance of the Company's conversion of its major insurance
industry applications software to client/server/host architecture
and the development of other insurance industry applications
software.
Although development efforts for the full release of Series
III for the property and casualty insurance industry will continue,
major components of Series III have been delivered since
development began in 1987.
While the Company intends to continue to develop applications
for IBM architecture platforms, it also intends to support open
systems. The first agreement to support open systems development
is with NCR Corporation ("NCR"), an AT&T subsidiary. NCR, now
known as AT&T Global Information Solutions ("AT&T Global") and the
Company will jointly market the Company's Series III systems
worldwide to insurance companies implementing AT&T's UNIX-based
solutions. AT&T Global has provided a full range of scalable
platforms to the Company. In addition, AT&T Global has made a
commitment to support the marketing of the Series III software and
to participate in the funding of the conversion of the Series III
host-associated software to AT&T Global's UNIX-based platforms.
AT&T has played a major role in the communications segment of the
insurance industry and has a long-standing relationship with the
Company. AT&T's acquisition of NCR, a leader in open systems
computing, allows the Company to respond to these trends and meet
the broader needs of the insurance industry. The agreement is
initially focused on the property and casualty sector of the
insurance industry.
In an effort to maintain and strengthen its competitive
position, the Company expends substantial amounts on internal
product development. Expenditures for internal product development,
18
19
which were capitalized, were $24.7 million in 1993, representing
5.5% of total revenues. In addition to its continuing development
efforts, the Company has, in the past several years, expended
significant amounts on business and software product acquisitions
in an effort to expand its product and services offerings and its
presence in the marketplace. In 1993, the Company acquired
software products with a cost basis of $25.1 million, representing
5.5% of total revenues. The Company intends to continue to expand
its product and services offerings through internal development and
acquisitions.
ITEM 2. PROPERTIES
The Company owns its Columbia, South Carolina, headquarters
complex and 145 acres of land on which the facility is located. In
early 1993, the Company completed construction of a 176,000 square
foot addition to its corporate headquarters costing $16,200,000.
The Company leases space for its regional and branch offices under
various leases.
The Company, through its data centers located in North
America, Europe and Australia, utilizes 12 mainframe computers. All
computers are owned or held under long-term leases. In total, these
computers have 5,232 megabytes of memory and are capable of
processing approximately 621.6 million instructions per second.
The Company is currently utilizing 75% to 80% of this capacity.
ITEM 3. LEGAL PROCEEDINGS
In April 1993, litigation was commenced against the Company
and certain of its present and former officers and directors in the
United States District Court for the District of South Carolina,
Columbia Division. In the litigation, which purports to be a class
action on behalf of purchasers of the Company's common stock
between March 18, 1992 and July 8, 1993, the plaintiffs allege that
the Company failed to prepare its financial statements in
accordance with generally accepted accounting principles and
omitted to disclose certain information regarding, among other
things, its business and prospects in violation of the Federal
securities laws, the South Carolina Code and common law. The
Company believes it has meritorious defenses to the claims and is
vigorously defending the litigation. The Company is unable to
predict the outcome or the potential financial impact of this
litigation.
In June 1993, the Securities and Exchange Commission ("SEC")
commenced a formal investigation into possible violations of the
19
20
Federal securities laws in connection with the Company's public
reports and financial statements, as well as trading in the
Company's securities. The Company is cooperating with the SEC in
connection with the investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
20
21
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. The following table sets forth
for the calendar periods indicated the high and low market prices
for the Company's common stock.
1993
High Low
First Quarter............................. $87 1/4 $74 1/2
Second Quarter............................ 86 1/4 32 7/8
Third Quarter............................. 36 3/4 21 5/8
Fourth Quarter............................ 31 3/8 22 1/4
1992
High Low
First Quarter............................. $73 $63
Second Quarter............................ 70 5/8 59 3/4
Third Quarter............................. 76 1/2 62 5/8
Fourth Quarter............................ 83 1/2 71 1/2
Title of Class
Common Stock, $.01 par value
Number of Record Holders as of March 11, 1994
1,584
21
22
ITEM 6. SELECTED FINANCIAL DATA
Results of Operations 1993
(In Thousands
Except Per Share Data)
Revenues............................ $453,099
Operating loss...................... (77,053)
Investment income, net.............. 10,656
Loss before income tax (benefit).... (66,397)
Net loss............................ $(56,134)
Net loss per share.................. $ (2.46)
(Restated)
Financial Condition 1993 1992
(In Thousands)
Cash and equivalents and
marketable securities....... $156,772 $238,521
Working capital............... 206,756 285,980
Total assets.................. 659,803 708,867
Long-term debt................ 5,655 6,001
Total liabilities............. 182,831 129,791
Stockholders' equity.......... 476,972 579,076
22
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
DUE TO THE UNAVAILABILITY OF FINANCIAL INFORMATION FOR THE
YEARS ENDED DECEMBER 31, 1992 and 1991, THE COMPANY IS CURRENTLY
UNABLE TO COMPARE THE RESULTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1993 WITH THE PRIOR PERIODS (See Notes to Consolidated
Financial Statements).
Liquidity and Capital Resources
During the year ended December 31, 1993, the Company generated
cash flow from operations of $80,823,000, $38,876,000 used for
investing activities and $49,801,000 used for financing activities.
Cash and equivalents and marketable securities aggregated
$156,772,000 at December 31, 1993 as compared to $238,521,000 at
December 31, 1992, a net decrease of $81,749,000. The principal
factors affecting such net decrease was the acquisition of CYBERTEK
Corporation in August 1993 for a total consideration of $59,727,000
and the repurchase in April 1993 of 970,668 shares of the Company's
common stock for total consideration of $48,660,000. Other
significant expenditures during the period included: acquisition
of data processing and communications equipment, support software
and office furniture and equipment ($35,832,000); software product
acquisitions and debt and contingency payments relating to past
business acquisitions ($13,629,000); and completion of construction
of additional office and dining facilities at the Company's
corporate headquarters ($2,077,000).
Significant expenditures anticipated for 1994, excluding
business acquisitions, are as follows: acquisition of data
processing and communications equipment, support software and
office furniture, fixtures and equipment ($13,400,000); payments
relating to past business acquisitions ($4,600,000).
In August 1993, the Company completed its previously announced
acquisition of CYBERTEK Corporation for total cash consideration of
$59,727,000. As a result of acquiring CYBERTEK's broad based life
insurance software systems, the Company changed certain development
plans and, accordingly, $1,368,000 of related deferred life
insurance systems' costs were written-off for the year ended
December 31, 1993. The Company is currently enhancing and
integrating the business functions of CYBERTEK products with the
Company's Series III life insurance applications and its Integrated
Application Platform architecture. The Company expects this effort
to continue through 1996 with the anticipated initial release of
the integrated applications being made generally available in late
1994 or early 1995 with subsequent releases to follow. Total
expenditures related to this effort are expected to approximate
$34,000,000, of which $1,300,000 was expended in 1993 and
23
24
$8,500,000 is anticipated for all of 1994. The Company expects to
generate savings through the closing of CYBERTEK's data center
operations and other cost reductions.
As described more fully below, the Company decided to
restructure its health insurance services business and take a
restructuring charge of $25,189,000 at June 30, 1993. Cash outlays
with respect to the restructuring charges approximated $1,490,000
during the year ended December 31, 1993 and approximately
$15,241,000 and $7,458,000, are anticipated in 1994 and 1995,
respectively. The Company completed the 1993 expenditures,
including the repurchase of its shares and the acquisition for cash
of CYBERTEK Corporation, without incurring any indebtedness.
The Company has historically used the cash generated from
operations for the following: development and acquisition of new
products, acquisition of businesses and repurchase of the Company's
stock. The Company anticipates that it will continue to use its
cash for all of these purposes in the future and that projected
cash from operations will be able to meet presently anticipated
needs; however, the Company may also consider incurring debt as
needed to accomplish specific objectives in these areas and for
other general corporate purposes.
Results of Operations
Consolidated revenues for the twelve months ended December 31,
1993 were adversely affected by lower than planned revenues from
the Company's health and life insurance services businesses. For
the year, the Company recognized revenues of $33,185,000 and an
operating loss of $16,643,000 from its health insurance services
business, before the effects of certain special charges described
below.
Near the end of the second quarter of 1993, the Company
projected that its annual health insurance services business
revenues would drop by approximately 50% from the revenue recorded
in 1992 to approximately $33,000,000 for all of 1993. The
Company's original forecast for 1993 health insurance systems
annual revenues was approximately $78,000,000. To better
understand both the cause and the anticipated duration of this
decline, the Company then undertook an assessment of the potential
impact on its health insurance services business of proposed health
care legislation, rapidly evolving and significant changes in the
relationship between health care providers and insurers and the
resultant changes in health insurers' software and service needs.
24
25
As a result of its evaluation, the Company determined that
there was no market demand for many of its health insurance systems
and automation support services, principally those designed for and
suited to traditional health indemnity insurance plans. Near the
end of the second quarter of 1993, it was becoming clear that
significant restructuring of the country's health care system would
occur, whether by government action or economic circumstances, and
consequently, insurers would be unwilling to make commitments for
any significant new systems until the uncertainty regarding the
ultimate outcome of reform was resolved. Furthermore, it seemed
most likely that traditional indemnity plans would not meet the
future needs of most employers and their insurers after such
changes.
After meetings in the second quarter and early third quarter
with its financial advisors, health care professionals and
customers, the Company determined that it did not have some of the
systems to respond to the most likely future initiatives in the
health care insurance industry and that many of the Company's
existing health insurance products, primarily those acquired in
business acquisitions, would require substantial modification or
complete reformation. This determination and the continuing
adverse impact of operating losses in its health insurance services
business led the Company to the conclusion that the current
carrying value of certain assets of the health insurance services
business unit, principally intangibles associated with traditional
health indemnity insurance plan services, was not fully recoverable
through sale or continuing operations.
As a consequence of these factors, the Company recorded, at
June 30, 1993, special impairment and restructuring charges to
reduce the carrying value of certain long-lived identifiable
intangible assets and goodwill and to recognize as a loss the
planned future abandonment of certain facilities and employee
severance and outplacement costs (See Note 13 of Notes to
Consolidated Financial Statements). As part of the Company's non-
cash impairment charges, acquired software amounting to $9,150,000
was written-off. Principal products that supported traditional
health indemnity insurance plans that were written-off included:
(1) a claims administration and payment system; (2) an
administrative system for membership, billing, collections and
receivables; and (3) a provider administration and reimbursement
system. The reduction in annual amortization related to these
software systems is approximately $2,551,000. Additionally, the
Company recorded other non-cash impairment charges to write-off the
carrying value of certain other identifiable intangibles
($6,320,000) and goodwill ($39,420,000) which will result in future
amortization reductions of approximately $3,796,000 on an annual
basis.
25
26
The Company, as part of its restructuring charges, decided to
downsize its health staff from 437 at June 30, 1993 to
approximately 388 at the end of 1993, with additional reductions in
staff scheduled to take place during 1994. These scheduled
reductions are estimated to reduce compensation and other benefits
cost by approximately $17,500,000 on an annual basis.
The Company, however, will continue to market and invest in
the internal development of its systems for managed care
applications. The Company believes these systems are suited for
larger, managed care plans and other health care payers.
The Company completed its acquisition of CYBERTEK Corporation
on August 24, 1993. CYBERTEK's revenues and net income for the
last full year prior to acquisition were $30,720,000 and
$3,059,000, respectively. For 1993, the Company recognized revenues
of $84,790,000 and an operating loss of $12,941,000 from its life
insurance software, professional and information services business,
which included the results of CYBERTEK since August 24, 1993. Of
the loss, $1,749,000 was attributable to amortization of intangible
assets arising from the CYBERTEK acquisition. Also, the Company's
decision to develop new releases of certain of its life systems
based on the business functions of CYBERTEK software and the
process of integrating CYBERTEK functionality into certain existing
Series III applications, had the effect of significantly reducing
revenues and increasing the operating loss from the life insurance
services business in the short term.
The information services business produced lower than expected
operating profits. The Company is attempting to direct more of its
information services business into database products and life and
health information services, where margins are generally higher.
The Company typically realizes a lower gross margin from
information services than from software products and related
services.
Revenues from total policy management outsourcing services
were adversely affected by the previously announced wind-down of
the New Jersey Market Transition Facility (MTF) project. Prior to
the wind-down of the MTF, annual MTF revenues in 1992 were
approximately $68,380,000. Revenues were $19,730,000 for 1993 as
the project came to an end. The Company was not able to reduce its
operating expenses as quickly as the reduction in revenue occurred
because of ongoing contractual obligations. As a result of an
increased role in servicing additional new contracts with insurance
companies and residual markets, the Company should start to replace
revenues, lost from the New Jersey MTF project, during the first
half of 1994. Margins, however, will be reduced during the early
phases of these contracts due to start-up costs.
26
27
The Company has identified several states where it can
potentially offer similar total policy management services. After
evaluating the potential operating and economic risks of each
opportunity, the Company will decide whether these services should
be marketed to the appropriate governmental agency. 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 Company, in December 1993, signed one of the largest
outsourcing agreements in its history. The Company contracted to
provide data processing services for Vital Forsikring A.S., a life
insurance company in Bergen, Norway; this contract together with
other outsourcing contract opportunities in Scandinavia, could
generate revenues of up to approximately $150 million over the
seven-year term of the agreement based on expected services
utilization. Additionally, the Company, during the last half of
1993, entered into several significant contracts with property and
casualty and life insurance companies for software licensing and
related implementation and consulting services.
The property and casualty insurance software and services
business achieved increased levels of revenue and operating income,
primarily from licensing activities. This operating income more
than offset the losses in the health and life insurance services
businesses. The commitments by customers for new products was
greater than the Company's anticipation for this business, although
lower in the second half of 1993. Outsourcing services for
property and casualty insurers did not meet expectations due to
several contracts not closing or ramping up as fast as anticipated.
The Company believes that this and the slow down in second half
licensing was largely due to the Company's delay in releasing the
results of its special audit and having available audited financial
statements. The operating profit margin maintained a level similar
to that experienced historically for property and casualty systems
and services.
The Company recorded charges related to early project
terminations, the deductible under the Company's Directors' and
Officers' liability insurance policy in response to shareholder
litigation, cost overruns on certain projects and other charges
arising from the Company's previously disclosed internal
investigation of its accounting practices. These charges totaled
$18,100,000 (after tax $11,200,000).
Effective January 1, 1993, the Company revised its estimate of
the period of future benefit for goodwill and certain other
acquired intangible assets. The effect of this change in
accounting estimate was to increase amortization expense by
$2,626,000 ($.09 per share) during the twelve months ended December
31, 1993. Commencing January 1, 1993, the Company revised the
27
28
period over which it will amortize its internally developed
software. The effect of this change in estimated life was to
decrease amortization expense by $1,839,000 ($.05 per share) during
the twelve months ended December 31, 1993 . (See Note 1 of Notes
to Consolidated Financial Statements.)
Investment income, net of investment expense and other charges
for the year ended December 31, 1993 was $10,656,000 which included
realized gains on the sale of marketable equity securities of
$3,388,000.
The effective income tax benefit rate (income taxes expressed
as a percentage of pre-tax income) was 15.5% for the year ended
December 31, 1993. The foregoing effective income tax benefit rate
includes the impact of the increase in the highest marginal
corporate tax rate resulting from the enactment of the Omnibus
Budget Reconciliation Act of 1993. The effective tax benefit rate
would have been significantly higher (38.6%) were it not for the
write off of goodwill ($39,420,000) related to the impairment of
the Company's health insurance systems business (See Note 13 of
Notes to Consolidated Financial Statements).
Seasonality and Inflation
The Company's operations have not proven to be significantly
seasonal, although quarterly revenues and net income could be
expected to vary at times. This is attributable principally to the
timing of customers entering into license agreements with the
Company and fluctuations in the amount of certain information
services used by customers, principally during holiday seasons and
periods of severe weather. The Company is unable to control the
timing of these decisions or fluctuations. In order to minimize
the impact of these decisions or fluctuations, the Company's long-
term business strategy is to build a larger base of recurring
systems licensing and services revenues.
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.
License agreements generally provide for increases in monthly
license charges based upon changes in the consumer price index and
customer premium volume. Long-term services agreements generally
provide for annual increases based on the percentage change in the
consumer price index.
28
29
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 Statement of Operations for the year
ended December 31, 1993............................. 31
Consolidated Balance Sheets as of
December 31, 1993 and 1992.......................... 32
Consolidated Statement of Changes in
Stockholders' Equity for the year ended
December 31, 1993................................... 33
Consolidated Statement of Cash Flows for the
year ended December 31, 1993........................ 34
Notes to Consolidated Financial Statements............. 35
Quarterly Consolidated Results of
Operations............................................. 52
Supplemental Schedules:
Schedule I - Marketable Securities..................... 53
Schedule V - Property and Equipment.................... 54
Schedule VI - Accumulated Depreciation and
Amortization of Property and Equipment.............. 55
Schedule VIII - Valuation and Qualifying Accounts...... 56
Schedule X - Supplementary Income
Statement Information............................... 57
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.
29
30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Policy Management Systems Corporation
We have audited the accompanying consolidated balance sheets of Policy
Management Systems Corporation and subsidiaries as of December 31, 1993 and
1992, and the related consolidated statement of operations, changes in
stockholders' equity and cash flows for the year ended December 31, 1993. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As further discussed in Note 2 to the consolidated financial statements,
management discovered certain errors in the Company's previously issued
financial statements. Accordingly, the balance sheet as of December 31, 1992
has been restated to reflect the correction of these errors.
In 1993 lawsuits were filed against the Company and certain of its present
and former officers and directors alleging violation of securities laws as well
as negligent misrepresentation. In addition, the Securities and Exchange
Commission is conducting an investigation into possible violations of Federal
securities laws. These issues are further discussed in Note 8 to the
consolidated financial statements. Management cannot predict the ultimate
impact of these actions on the consolidated financial statements. Accordingly,
no provisions have been made in the consolidated financial statements.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Policy
Management Systems Corporation and subsidiaries as of December 31, 1993 and
1992, and the results of their operations and their cash flows for the year
ended December 31, 1993 in conformity with generally accepted accounting
principles.
Atlanta, Georgia Coopers & Lybrand
April 5, 1994
30
31
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended
December 31, 1993
(In Thousands,
Except Per Share Data)
Revenues:
Licensing..................................... $ 74,664
Services...................................... 378,435
453,099
Costs and Expenses:
Cost of services.............................. 351,411
Selling, general and administrative........... 50,792
Impairment and restructuring charges.......... 80,733
Other operating costs and expenses............ 47,216
530,152
Operating loss.................................. (77,053)
Investment income, net.......................... 10,656
Loss before income tax benefit.................. (66,397)
Income tax benefit.............................. 10,263
Net loss........................................ $(56,134)
Net loss per share.............................. $( 2.46)
Weighted average number of shares............... 22,858
See accompanying notes.
31
<PAGE 32>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(As Restated)
December 31, December 31,
1993 1992
(In Thousands,
Except Share Data)
Assets
Current assets:
Cash and equivalents..................................................... $ 24,122 $ 31,959
Marketable securities.................................................... 132,650 206,562
Receivables, net of allowance for uncollectible amounts
of $1,817 ($1,630 at 1992)............................................ 92,975 86,684
Income tax receivable.................................................... 18,764 2,891
Deferred income taxes.................................................... 9,491 8,083
Other.................................................................... 9,735 9,659
Total current assets.................................................. 287,737 345,838
Property and equipment..................................................... 139,029 131,696
Receivables................................................................ 4,716 22,252
Goodwill and other intangible assets....................................... 85,969 100,792
Capitalized software costs................................................. 117,513 99,414
Deferred income taxes...................................................... 21,585 2,580
Other...................................................................... 3,254 6,295
Total assets.......................................................... $659,803 $708,867
Liabilities
Current liabilities:
Accounts payable and accrued expenses.................................... $ 42,256 $ 36,151
Accrued restructuring and lease termination costs........................ 9,521 -
Accrued contract termination costs....................................... 2,714 5,030
Current portion of long-term debt........................................ 6,986 3,670
Unearned revenues........................................................ 19,121 11,361
Other.................................................................... 383 3,646
Total current liabilities............................................. 80,981 59,858
Long-term debt............................................................. 5,655 6,001
Deferred income taxes...................................................... 74,151 56,112
Accrued restructuring and lease termination costs.......................... 19,735 -
Other...................................................................... 2,309 7,820
Total liabilities..................................................... 182,831 129,791
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,
22,637,021 shares issued and outstanding (23,524,197 at 1992)........... 226 235
Additional paid-in capital................................................. 262,167 307,906
Retained earnings.......................................................... 216,632 272,766
Foreign currency translation adjustment.................................... (2,053) (1,831)
Total stockholders' equity............................................ 476,972 579,076
Total liabilities and stockholders' equity......................... $659,803 $708,867
<FN>
See accompanying notes.
32
33
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Addi- Foreign
tional Currency
Common Paid-In Retained Translation
Stock Capital Earings Adjustment Total
(In Thousands)
Balance, December 31, 1992
as previously reported.................... $235 $307,906 $267,709 $(1,831) $574,019
Effect of restatement
attributable to prior years............... - - 5,057 - 5,057
Balance, December 31, 1992,
as restated................................ 235 307,906 272,766 (1,831) 579,076
Net loss..................................... - - (56,134) - (56,076)
Stock options exercised (21,777 shares)...... - 1,062 - - 1,062
Repurchase of 970,668 shares of common stock. (10) (48,650) - - (48,660)
Issuance of stock to employee benefit
plan (61,715 shares)....................... 1 1,849 - - 1,850
Foreign currency translation adjustment...... - - - (222) (222)
Balance, December 31, 1993................... $226 $262,167 $216,632 $(2,053) $476,972
<FN>
See accompanying notes.
33
34
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended
December 31, 1993
(In Thousands)
Operating Activities
Net loss.......................................... $(56,134)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization................... 63,157
Deferred income taxes........................... (2,997)
Gain on sale of marketable securities........... (3,388)
Provision for uncollectible accounts............ 1,768
Impairment charges.............................. 54,890
Changes in assets and liabilities:
Restructuring charges........................... 25,843
Receivables..................................... 19,748
Income tax receivable........................... (15,873)
Accounts payable and accrued expenses........... (1,460)
Income taxes payable........................... 1,327
Other, net........................................ (6,058)
Cash provided by operations.................. 80,823
Investing Activities
Proceeds from sales/maturities of marketable
securities, net.................................. 382,973
Purchases of marketable securities, net........... (296,344)
Acquisition of property and equipment............. (39,272)
Capitalized internal software development costs... (24,698)
Purchased software................................ (4,336)
Proceeds from disposal of property and equipment.. 9,062
Business acquisitions............................. (66,261)
Cash used for investing activities........... (38,876)
Financing Activities
Payments on long-term debt........................ (3,681)
Issuance of common stock under stock
option plans..................................... 690
Issuance of common stock to employee benefit plan. 1,850
Repurchase of outstanding common stock............ (48,660)
Cash used for financing activities........... (49,801)
Effect of exchange rate changes on cash............. 17
Net increase in cash and equivalents................ (7,837)
Cash and equivalents at beginning of period......... 31,959
Cash and equivalents at end of period............... $ 24,122
Noncash Activities
Long-term debt arising from and assumed in
connection with business acquisition............. $ 6,580
Supplemental Information
Interest paid..................................... 1,579
Income taxes paid................................. 13,431
<FN>
See accompanying notes.
34
35
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 subsidiaries, all of which are
wholly-owned. All material intercompany balances and transactions
have been eliminated. Certain amounts previously presented in the
consolidated financial statements for prior periods have been
reclassified to conform to current classifications.
Revenue Recognition
The Company's revenues are generated primarily by licensing to
customers standardized insurance software systems and providing
automation and administrative support and information services to
the insurance industry.
Software systems are licensed under the terms of substantially
standard nonexclusive and nontransferable license 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, which grants a right to use the
software system currently available at the time the license is
signed, is recognized as revenue upon delivery of the product and
receipt of a signed contractual obligation. The monthly license
charge 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 any additions or
modifications 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.
The Company provides professional support services, including
systems implementation and integration assistance and consulting
and educational services, which are available under services
agreements and charged for separately. These services are generally
provided under time and material contracts and in some
circumstances under fixed price arrangements. Under fixed price
contracts, revenue is recognized on the basis of the estimated
percentage of completion of service provided using the cost to cost
method. Changes in estimates to complete and losses, if any, are
recognized in the period in which they are determined.
35
36
The Company also offers information and outsourcing services
ranging from making available software licensed from the Company on
a remote processing basis from the Company's data centers, to
complete systems management, processing, administrative support and
automated information services through the Company's nationwide
telecommunications network using the Company's database products.
Outsourcing services are typically provided under contracts having
terms from three to ten years. Revenues from substantially all
outsourcing and information services are recognized at the time the
service is performed.
Marketable Securities
Interest bearing marketable securities are stated at amortized
cost, which approximates market value. Current marketable equity
securities are stated at the aggregate of lower of cost or market
and a valuation allowance is provided for the excess, if any, of
cost over market. The fair values of marketable securities are
estimated based on quoted market prices for those or similar
investments. Gains or losses on marketable securities are
determined on the specific identification method.
Investment securities with maturities of three months or
less at the time of acquisition are considered cash equivalents.
Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities,"
(FAS 115) was issued in May 1993. FAS 115 addresses the accounting
and reporting for investments in equity securities that have
readily determinable fair values and for all investments in debt
securities. FAS 115 is effective for fiscal years beginning after
December 15, 1993; accordingly, the Company will adopt provisions
of FAS 115 on January 1, 1994. Adoption of FAS 115 is not
anticipated to have a material impact on the financial statements
taken as a whole.
Property and Equipment
Property and equipment, including certain equipment acquired
under capital leases and support software acquired for internal
use, are stated at cost less accumulated depreciation and
amortization. Property and equipment are depreciated on a
straight-line basis over their estimated useful lives. Assets
acquired under capital leases are amortized over the term of the
related lease.
36
37
Goodwill and Other Acquired Intangible Assets
Since 1983, the Company has completed 34 business
acquisitions, all of which have been recorded using the purchase
method of accounting. As a result of purchase accounting,
specifically 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 constant
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
based upon the latest available economic factors and circumstances.
Additionally, the Company evaluates the full recoverability of all
long-lived assets including specific intangible assets and goodwill
based upon a comparison of discounted estimated future cash flows
from the related operations with the then corresponding carrying
values of those assets. A rate considered to be commensurate with
the risk involved is used to discount the cash flows.
For all years through December 31, 1992, the Company had
amortized goodwill over an estimated useful life of 25 years. As
a result of its most recent evaluation, the Company has revised its
estimates of the period of future benefit for goodwill.
Consequently, effective January 1, 1993, the Company began to
amortize goodwill over an estimated life of 15 years for goodwill
related to information and computer services company acquisitions
and 10 years for goodwill related to software company acquisitions.
The Company believes these new lives more appropriately reflect the
current economic circumstances for such businesses and the related
period of future benefit. Longer lives will be used for future
business acquisitions only where independent third party studies
support such lives. The effect of this change in accounting
estimate was to increase amortization expense by $2,626,000 ($.09
per share) during the year ended December 31, 1993. Also as part
of this evaluation, the net book value of intangible assets related
to the Company's health insurance services business of $45,740,000,
most of which was goodwill, was written off during the twelve
months ended December 31, 1993 (See Note 13).
Other identifiable purchased intangible assets are being
amortized on a straight-line basis over their estimated period of
benefit ranging from 5 to 10 years.
37
38
Computer Software
In accordance with Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed" (FAS 86), certain costs incurred in
the internal development of computer software which is to be
licensed to customers and costs of purchased computer software,
consisting primarily of software acquired through business
acquisitions, are capitalized and amortized 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 over the
remaining estimated economic life of the product including the
period being reported on. 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. All
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
$2,735,000 during the year ended December 31, 1993.
As part of the Company's restatement of its prior years'
retained earnings (See Note 2), additional software costs amounting
to $30,487,000 ($18,863,000 net of tax) were capitalized as of
December 31, 1992. A detailed study of all software-related
expenditures dating back to December 15, 1988 indicated significant
misallocation and overexpensing of development costs. This error
relating to under-capitalization of software development costs was
due to certain weaknesses in the Company's then existing cost
accounting and accumulation system which did not capture all
appropriately capitalizable costs as defined in FAS 86. The
additional capitalized costs include both elements of direct and
indirect costs as described above as required by FAS 86. All of
the additional capitalized software costs are related to the
Company's property and casualty business software systems.
Additional development costs relating to the Company's internally
developed Series III life systems were not capitalized because all
the conditions of FAS 86 were not met. No significant software
development costs were capitalized for the Company's health
insurance business since any such costs would have been written off
as part of the impairment and restructuring charges (See Note 13).
The additional capitalized software costs are reflected in restated
balances (See Note 7).
38
39
For all years through December 31, 1992, the Company amortized
internally developed software on a straight-line basis over an
estimated useful life of four years. The Company's recent
experience indicates that an estimated useful life of five years
would more appropriately reflect the actual useful life of such
software. Accordingly, commencing January 1, 1993, the Company
began to amortize such software on a straight-line basis over five
years. Amortization charged to expense was $22,391,000 for the
year ended December 31, 1993; as a result of the change in
estimated life described above, amortization expense was $1,839,000
($.05 per share) less than it would have been using the previous
four year life.
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 bases 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.
Net Income Per Share
Net income per share is based upon the weighted average number
of common shares outstanding. Outstanding stock options are common
stock equivalents, but are excluded from the computation of net
income per share since their dilutive effect is not material.
Foreign Currency Translation
The local currencies of the Company's foreign subsidiaries
have been determined to be the 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 stockholders'
equity. 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.
39
40
NOTE 2. RESTATEMENT OF PRIOR YEARS' RESULTS OF OPERATIONS
In August 1993, the Company engaged independent accountants to
conduct a special audit of the Company's consolidated financial
statements as of and for the six months ended June 30, 1993. As a
result of this audit, the Company determined that retained earnings
previously reported as of December 31, 1992 required adjustment.
These adjustments were due to errors in the application of
accounting principles and subsequent discovery of facts existing at
February 26, 1993, the date of the predecessor auditor's report.
The Company is in the process of determining the specific
prior period or periods affected by the adjustments. Once
determined, the Company intends to restate the financial statements
for such periods. The components, net of related tax effects, of
the cumulative adjustment to retained earnings as of December 31,
1992 are as follows:
Increase (Decrease)
to Retained Earnings
(In Thousands)
Elimination of revenue related to
a contingent contract that
was cancelled........................... $ (820)
Deferral of revenues due to changes
in timing of revenue recognition........ (8,408)
Reduction of expenses due to
capitalization of certain software
costs (See Note 1)...................... 18,863
Recognition of expenses due to changes
in timing of expense accrual............ (1,622)
Reserve for losses on certain
services contracts...................... (5,536)
Reduction of current income tax
liability due to previously
unrecorded tax credits.................. 2,580
Cumulative retained earnings
adjustment as of December 31, 1992...... $ 5,057
Deferral of revenues due to changes in timing of revenue
recognition includes situations where (i) there were errors in
accounting for contracts under the percentage of completion method;
(ii) there were delays in receiving signed contracts beyond
December 31, 1992; (iii) customers prepaid or were billed for
services performed in subsequent periods or where refunds or
provisions for credit were contractually required and (iv) the
Company had future delivery obligations under certain contracts.
40
41
NOTE 3. ACQUISITION
On August 24, 1993, the Company consummated the acquisition of
all of the outstanding stock of CYBERTEK Corporation ("CYBERTEK")
for an aggregate consideration of $59,727,000 in cash. CYBERTEK
has over 20 years of experience in serving the data processing
needs of the life insurance industry by designing and delivering a
combination of data processing services, consulting services and
software to enable its customers to manage their business.
The acquisition has been recorded using the purchase method of
accounting. Accordingly, the consolidated statements of operations
of the Company for the year ended December 31, 1993 include the
results of operations of CYBERTEK only from the date of acquisition
through period end. The impact of the acquisition on the
consolidated results of operations for the year ended December 31,
1993 was not significant. The cost of acquisition was determined,
and assigned to assets acquired, as follows:
(In Thousands)
Total consideration paid............... $58,152
Direct costs of acquisition............ 1,575
Total cost to be assigned to net
assets acquired...................... 59,727
Add - Liabilities assumed.............. 13,876
Less - Cost assigned to tangible and
identifiable intangible assets
acquired (including $10,623
purchased software cost)............. 47,338
Cost assigned to goodwill.............. $26,265
NOTE 4. MARKETABLE SECURITIES
Marketable securities consist of the following:
December 31,
1993 1992
(In Thousands)
Municipal bonds and notes.............. $127,505 $197,115
U.S. Government and Agency securities.. 4,795 9,072
Equity securities...................... 350 375
Total.............................. $132,650 $206,562
Market value........................... $134,983 $208,334
Investment income is shown net of interest expense and other
charges of $2,641,000 and includes a realized gain on marketable
securities of $3,388,000 for the year ended December 31, 1993.
41
42
NOTE 5. PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
Estimated December 31,
Useful Life 1993 1992
(Years) (In Thousands)
Cost:
Land...................................... - $ 2,557 $ 2,557
Buildings and improvements................ 10-40 59,618 41,820
Construction in progress.................. - - 15,721
Leasehold improvements.................... 1-10 3,293 3,351
Office furniture, fixtures and equipment.. 5-15 37,630 30,370
Data processing and communications
equipment and support software......... 2-5 134,552 116,135
Other..................................... 3-5 4,002 5,472
241,652 215,426
Less: Accumulated depreciation
and amortization........................ (102,623) (83,730)
Property and equipment..................... $139,029 $131,696
In mid-1991, the Company began construction of a 176,000
square foot addition to its corporate headquarters which was
completed in early 1993 at a total cost of $16,200,000.
Depreciation and amortization charged to expense was $27,184,000
for the year ended December 31, 1993.
NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS
A summary of goodwill and other intangible assets is as
follows:
December 31,
1993 1992
(In Thousands)
Goodwill.............................. $ 76,500 $ 90,468
Customer lists........................ 27,010 25,905
Covenants not to compete.............. 4,956 4,486
Other................................. 3,653 9,268
112,119 130,127
Less: Accumulated amortization....... (26,150) (29,335)
$ 85,969 $100,792
42
43
Amortization charged to expense was $9,274,000 for the year
ended December 31, 1993. See Note 13 for a discussion of the
write-off of certain impaired goodwill and other intangible assets.
NOTE 7. CAPITALIZED SOFTWARE COSTS
A summary of capitalized software costs is as follows:
December 31,
1993 1992
(In Thousands)
Internally developed software......... $124,326 $ 99,628
Purchased software.................... 47,655 41,014
171,981 140,642
Less: Accumulated amortization....... (54,468) (41,228)
Capitalized software costs............ $117,513 $ 99,414
Purchased software in the amount of $9,150,000 (which was net
of $9,151,000 of related amortization) was written-off as part of
the Company's impairment and restructuring charges relating to its
health business (See Note 13). Also, $1,368,000 relating to the
nonrecoverability of certain deferred life insurance systems
development costs was written-off for the year ended December 31,
1993; this amount is also included in other operating costs and
expenses in the accompanying Consolidated Statement of Operations.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Commitments
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 $7,745,000 for the year
ended December 31, 1993. Amounts of $7,751,000 for lease
termination costs and $12,227,000 for lease abandonment charges are
included in the impairment and restructuring charges in the
accompanying statement of operations (See Note 13).
The Company leases certain data processing and related
equipment primarily under operating leases expiring through 1995.
Rent expense under operating leases for such equipment was
$4,295,000 for the year ended December 31, 1993. Future minimum
lease obligations under noncancelable operating leases are stated
below and include a lease termination payment in 1994 amounting to
$7,751,000 and payments over 10 years aggregating $17,575,000
related to a leasehold planned for future abandonment (See Note
13):
43
44
Facilities
Year Ending December 31, (In Thousands)
1994............................ $14,789
1995............................ 4,957
1996............................ 4,472
1997............................ 3,724
1998............................ 6,900
Thereafter...................... 11,672
Total............................. $46,514
Contingencies
In April 1993, litigation was commenced against the Company
and certain of its present and former officers and directors in the
United States District Court for the District of South Carolina,
Columbia Division. In the litigation, which purports to be a class
action on behalf of purchasers of the Company's common stock
between March 18, 1992 and July 8, 1993, the plaintiffs allege that
the Company failed to prepare its financial statements in
accordance with generally accepted accounting principles and
omitted to disclose certain information regarding, among other
things, its business and prospects in violation of the Federal
securities laws, the South Carolina Code and common law. The
Company believes it has meritorious defenses to the claims and is
vigorously defending the litigation. The plaintiffs seek
unspecified compensatory damages, legal fees and litigation costs.
The Company is unable to predict the outcome or the potential
financial impact of this litigation.
In June 1993, the Securities and Exchange Commission ("SEC")
commenced a formal investigation into possible violations of the
Federal securities laws in connection with the Company's public
reports and financial statements, as well as trading in the
Company's securities. The SEC has issued a formal order of
investigation which provides the SEC staff with the power to
subpoena documents and to compel testimony in connection with their
investigation. The Company is cooperating with the SEC in
connection with this investigation.
NOTE 9. LONG-TERM DEBT
Long-term debt is as follows:
December 31,
1993 1992
(In Thousands)
Notes payable, due through February 2015,
interest at 3.69% to 9.00%............. $12,641 $ 9,671
Less: Current portion.................... (6,986) (3,670)
Long-term debt........................... $ 5,655 $ 6,001
44
45
NOTE 10. INCOME TAXES
A reconciliation of the difference between the actual income
tax benefit and the expected benefit for the year ended December
31, 1993, computed using the applicable statutory rate is as
follows (in thousands):
Statutory Rate 35%
Income tax benefit computed at
statutory rate............................. $(23,239)
Increase (decrease) in taxes due to:
Goodwill................................... 15,205
Nontaxable investment income. ............. (2,391)
State and local income taxes, net
of federal tax effect.................... (913)
Increase in statutory rate................. 1,080
Other...................................... (5)
Actual income tax benefit.................... $(10,263)
Effective income tax benefit rate............ 15.5%
An analysis of the income tax benefit for the year ended
December 31, 1993 is as follows (in thousands):
Current taxes.................................. $ (7,266)
Deferred income taxes relating to
temporary differences:
Depreciation and amortization of property,
equipment and intangibles................ 3,834
Capitalized internal software
development costs........................ 4,914
Restructuring of operations................ (12,855)
Other...................................... 1,110
(2,997)
Total income tax benefit................... $(10,263)
45
46
An analysis of the net deferred income tax liability is as
follows:
December 31,
1993 1992
(In Thousands)
Current deferred assets:
Net operating loss carryforward.......... 4,315 157
Other.................................... 5,176 7,926
Current deferred assets................ $9,491 $ 8,083
Long term deferred assets:
Restructuring of operations............. 12,855 -
State tax credits....................... 4,987 2,580
Other................................... 3,743 -
Long term deferred assets............... 21,585 2,580
Total deferred assets................. $31,076 $10,663
Long term deferred liabilities:
Depreciation and amortization of
property, equipment and intangibles... $28,272 $23,726
Capitalized internal software
development costs..................... 32,971 28,073
Other................................... 12,908 4,313
Total deferred liabilities............ $74,151 $56,112
The Company generated a $10,926,000 net operating loss for the
year ended December 31, 1993 for tax purposes. This loss, which is
anticipated to be carried forward, will expire in 2008.
Additionally, the Company has loss carryforwards of $1,483,000 at
December 31, 1993 related to a business acquisition in 1991. The
acquired loss carryforwards are subject to a $415,000 annual
limitation and will expire in 2002. The entire benefit related to
the Company's loss carryforwards has been recognized in the
financial statements.
On August 10, 1993 the Omnibus Budget Reconciliation Act of
1993 was signed into law. This Act increased the highest marginal
federal income tax rate from 34 percent to 35 percent. Under the
provisions of FAS 109, deferred tax liabilities and assets are
adjusted for the effect of a change in tax laws or rates.
Furthermore, the effect is included in the income tax provision for
the reporting period that includes the enactment date. As such,
the net loss for the period ended December 31, 1993 was increased
by $1,080,000 to reflect the increase in tax rates.
In 1992, the Internal Revenue Service completed an examination
of the Company's consolidated federal income tax returns for the
years 1985 through 1988 and has proposed certain adjustments to
46
47
income and credits that result in proposed tax deficiencies in the
amount of $17,785,000 for those years. The Company believes that
its judgment in the areas for which adjustments have been proposed
has been appropriate and is contesting the proposed adjustments.
The Company believes that adequate amounts of federal income taxes
are provided in the consolidated financial statements.
NOTE 11. EMPLOYEE BENEFIT PLANS
Profit Sharing Retirement Plan
Eligible employees of the Company are covered under the
Company's profit sharing retirement plan. The Company's
contribution to the plan is determined by the Board of Directors of
the Company. Employees make no contributions to this plan. The
Company made a contribution of $800,000 in early 1993 for the plan
year 1992.
Retirement Savings Plan
The Company offers a 401(k) retirement savings plan for
eligible employees. Participants can elect to have up to 6% of
their salary withheld for investment in the program and the Company
will make a matching contribution of $.50 for each $1.00 of
employee participation. Participants may also make limited
additional contributions which are not subject to matching
contributions by the Company. Participants have several options
as to how their contributions may be invested, but through
October 1993, all matching contributions had been invested in
common stock of the Company. Company contributions made after
October 1993 were, and continue to be, invested in a government
money market fund, except as participants may otherwise redirect
such Company contributions previously made. Except in certain
instances, participant contributions are made from pre-tax wages.
The Company's contribution on behalf of participating employees
was $1,914,000 for the year ended December 31, 1993.
Stock Option Plans
The Company has various 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. In
1992, options were granted under the 1989 Stock Option Plan to
eligible employees and members of the Board of Directors, subject
to approval by the Company's stockholders of an amendment to
increase the number of shares available for grant under that plan.
In January 1993, options were also granted under the Company's 1993
Long-term Incentive Plan for eligible executives, subject to
approval by the Company's stockholders. At the annual meeting of
the Company's stockholders in April, 1993, the amendment to the
1989 Stock Option Plan and the 1993 Long-Term Incentive Plan for
Executives were approved.
47
48
Option activity under all of the stock option plans is
summarized as follows:
Year Ended
December 31, 1993
Shares under option at beginning of
year.............................. 1,202,856
Granted.............................. 592,500
Exercised............................ (21,777)
Forfeited............................ (48,460)
Shares under option at end of year... 1,725,119
Shares under option exercisable
at end of period.................. 766,805
Shares available for future grant.... 1,175,916
Shares under option exercisable at January 1, 1993 were
443,297. The exercise price of options exercised under plans other
than under the 1993 Long-Term Incentive Plan for Executives during
the year ended December 31, 1993 were $15.13 to $49.63 and the
exercise prices of shares under option at December 31, 1993,
other than under the 1993 Long-Term Incentive Plan for Executives,
were $15.13 to $69.38.
All options granted under plans other than under the 1993
Long-Term Incentive Plan for Executives have exercise prices at
100% of market value at date of grant and are exercisable at the
rate of 33 1/3% per year (cumulative) beginning one year from date
of grant.
Options granted in 1993 under the 1993 Long-Term Incentive
Plan for Executives have been granted at 105% of market value at
the date of grant; all these options have an exercise price of
$81.90. (For individuals who later may be selected to participate
in the 1993 Long-Term Incentive Plan for Executives, said
percentage is based on the year the individual is selected as
follows: 1993 - 105%; 1994 - 104%; 1995 - 103%; 1996 - 102%; 1997 -
101%; and 1998 - 100%.) Options granted under the plan in 1993
become exercisable as follows: 25% on January 1, 1995; 25% on
January 1, 1997; and 50% on January 1, 1999. For individuals who
later may be selected to participate in the plan, the number of
options granted and what percentage become exercisable on the above
dates are determined according to formulas described in the plan.
48
49
NOTE 12. CERTAIN TRANSACTIONS
In August 1989, International Business Machines Corporation
("IBM") acquired directly from the Company a 19.8% interest in the
Company's outstanding voting stock for $116,775,000 representing
3,797,561 shares. IBM is entitled to increase its ownership
interest up to a maximum of 30% by purchasing the Company's common
stock in the open market. IBM's ownership interest was 16.8% at
December 31, 1993, representing the original 3,797,561 shares
acquired.
Certain officers of the Company participated in the Company's
long-term incentive plan for executives, which began January 1,
1987 and ended December 31, 1992. The plan provided for the
payment of pre-established bonuses, payable either in cash, common
stock of the Company or a combination thereof, if certain earnings
per share performance goals were reached by the Company during the
six-year life of the plan. Bonuses earned under this plan for the
final two-year period ended December 31, 1992, were paid in 1993,
in a combination of $5,410,000 in cash and 45,348 shares of common
stock.
On April 7 and 8, 1993, the Company repurchased, on the open
market, all of the 970,668 shares of the Company's common stock
authorized under a previously approved stock repurchase program for
a total consideration of $48,660,000.
NOTE 13. IMPAIRMENT AND RESTRUCTURING CHARGES
During the first half of 1993, the Company experienced
markedly decreased revenues from its health insurance services
business unit. Near the end of the second quarter of 1993, the
Company projected that its annual health insurance services
business revenues would drop by approximately 50% from the revenue
recorded in 1992 to approximately $33,000,000 for all of 1993, and
that trend of decline would continue into 1994. To better
understand both the cause and the anticipated duration of this
decline, the Company then undertook an assessment of the potential
impact on its health insurance systems business of proposed health
care legislation, rapidly evolving and significant changes in the
relationship of health care providers and insurers and the
resultant changes in health insurers' software and service needs.
After meetings with its financial advisors, health care
professionals and customers, the Company determined that it did not
have some of the systems to respond to the most likely future
initiatives in the health care insurance industry and that many of
the Company's existing health insurance services products,
primarily those acquired in business acquisitions, would require
substantial modification or complete reformation. This
determination and the continuing adverse impact of operating losses
in its health business led the Company to the conclusion that the
49
50
current carrying value of certain assets of the health insurance
services business unit, principally intangibles, associated with
traditional indemnity insurance plan services, was not fully
recoverable through sale or continuing operations. Accordingly,
the Company recorded an impairment charge of $54,890,000 at June
30, 1993 to reduce the carrying value of certain long-lived
identifiable intangible assets ($6,320,000 - customer lists,
covenants not to compete and assembled workforce), acquired
software ($9,150,000) and goodwill ($39,420,000) related to its
health business.
The Company applied its methodology for determining impairment
of intangibles (see Note 1) by discounting the expected future cash
flows from this business. In this case, the present value of the
expected cash flows was determined using a discount rate of 17%
which the Company considers to be commensurate with the risk
involved. This rate was determined using the Capital Asset Pricing
Model which reflects the return the Company should achieve on its
investments. An additional risk premium was included in the rate
to recognize the uncertainty associated with the health insurance
services business.
Additionally, as a result of the impairment of its health
business, the Company decided to restructure this business and
recorded a restructuring charge of $25,189,000 at June 30, 1993.
Costs to restructure the health insurance services business are
composed of $5,211,000 associated with employee severance and
outplacement, and $19,978,000 related to an ongoing lease
obligation and/or termination for the planned future abandonment of
certain leased office facilities. The Company also recorded other
pre-tax restructuring charges of $655,000. It is anticipated that
these restructurings will be completed during 1994.
NOTE 14. SEGMENT INFORMATION
The Company operates in one business segment, providing
computer software systems and related automation and administration
support and information services to the insurance industry.
Approximately 90% of the Company's revenues are generated from
products and services provided in the United States and no one
customer accounted for more than 10% of revenues during the year
ended December 31, 1993.
50
51
NOTE 15. CONCENTRATION OF CREDIT RISK
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 and 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 are 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 condition, but generally
does not require collateral to support customer receivables. The
Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers,
historical trends and other information.
51
52
POLICY MANAGEMENT SYSTEMS CORPORATION
QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS
Six
Months
Ended (Unaudited) (Unaudited)
June 30, Third Fourth
1993 Quarter Quarter
(In Thousands Except Per Share Data)
1993
Revenues................... $235,923 $108,885 $108,291
Operating income (loss).... (82,148) 752 4,343
Investment income, net..... 7,941 1,333 1,382
Income (loss) before
income taxes (benefit)... (74,207) 2,085 5,725
Net income (loss).......... $(60,423) $ 346 $ 3,943
Net income (loss) per
share.................... $ (2.62) $ .02 $ .17
As a result of a special audit of the Company's balance sheet as
of December 31, 1992 and its consolidated financial statements as of
and for the six months ended June 30, 1993, the Company determined
that retained earnings previously reported as of December 31, 1992
required adjustment. The Company is in the process of determining the
specific period affected by the adjustments. Once determined, the
Company intends to restate the financial statements for such periods
(See Note 2 of Notes to Consolidated Financial Statements).
The results of operation for the six months ended June 30, 1993
reflect special impairment and restructuring charges of $80.7 million
(after taxes, $65.0 million, or $2.81 per share). See Note 13 of
Notes to Consolidated Financial Statements. Additionally, the Company
recorded charges related to early project terminations, the deductible
under the Company's Directors' and Officers' liability insurance
policy in response to shareholder litigation, costs overruns on
certain projects and other charges arising from the Company's
previously disclosed internal investigation of its accounting
practices of approximately $18.1 million (after taxes $11.2 million,
or $.48 per share).
52
53
SCHEDULE I
POLICY MANAGEMENT SYSTEMS CORPORATION
MARKETABLE SECURITIES
December 31, 1993
Maturity Amortized Market Book
Description Value Cost Value Value
(In Thousands)
3.24% - 11.0% Municipal bonds
and notes, maturing on various
dates through December 1998
(all rated AA- or better)........ $122,189 $127,505 $129,702 $127,505
5.29% - 9.50% U.S. Government and
Agency securities, maturing on
various dates through November
1994............................. 4,698 4,795 4,931 4,795
200,000 shares, The Seibels Bruce
Group, Inc. common stock,
par value $1 per share........... - - 350 350
$126,887 $132,300 $134,983 $132,650
53
54
SCHEDULE V
POLICY MANAGEMENT SYSTEMS CORPORATION
PROPERTY AND EQUIPMENT
Balance Addi-
At tions Other Balance
Beginning At Retire- Changes At End
of Year Cost ments (1) of Year
(In Thousands)
Year ended
December 31, 1993:
Land and improvements...... $ 2,557 $ - $ - $ - $ 2,557
Buildings.................. 41,820 1,347 - 16,451 59,618
Construction in progress... 15,721 730 - (16,451) -
Leasehold improvements..... 3,351 269 (682) 355 3,293
Office furniture,
fixtures and equipment... 30,370 5,987 (201) 1,474 37,630
Data processing and
communications equipment
and support software..... 116,135 29,983 (14,689) 3,123 134,552
Other...................... 5,472 956 (2,206) (220) 4,002
$215,426 $39,272 $(17,778) $ 4,732 $241,652
Note
(1)Includes assets acquired through business acquisitions, foreign currency
translation adjustments, transfers and other adjustments.
54
55
SCHEDULE VI
POLICY MANAGEMENT SYSTEMS CORPORATION
ACCUMULATED DEPRECIATION AND
AMORTIZATION OF PROPERTY AND EQUIPMENT
Balance Addi-
At tions Other Balance
Beginning To Retire- Changes At End
of Year Expense ments (1) of Year
(In Thousands)
Year ended
December 31, 1993:
Buildings.................. $ 7,618 $ 1,699 $ - $ - $ 9,317
Leasehold improvements..... 1,838 349 (349) - 1,838
Office furniture,
fixtures and equipment... 15,418 2,832 (175) 8 18,083
Data processing and
communications equipment
and support software..... 55,417 21,719 (7,189) 167 70,114
Other...................... 3,439 585 (493) (260) 3,271
$83,730 $27,184 $ (8,206) $ (85) $102,623
Note
(1) Includes foreign currency translation adjustments, transfers and other
adjustments.
55
56
Schedule VIII
POLICY MANAGEMENT SYSTEMS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance Charged
at to Balance
Beginning Costs & (1) at End
Description of Period Expenses Other Deductions of Period
(In Thousands)
Allowance for
uncollectible
amounts
Year ended
December 31, 1993 $1,630 1,768 601 (2,182) $ 1,817
Accrued restruct
- - - - - -uring and lease
termination cost
Year ended
December 31, 1993 $ 0 29,696 0 (440) $29,256
Note
(1) Acquired through business acquisition.
56
57
SCHEDULE X
POLICY MANAGEMENT SYSTEMS CORPORATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION
Year ended December 31,
1993
(In Thousands)
Amortization of intangible assets:
Computer software...................... $24,844
Intangible assets from business
acquisitions......................... 9,274
Maintenance and repairs.................. 8,118
$42,236
57
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Item 4 of the Company's Report on Form 8-K, dated August 17,
1993, is incorporated herein by reference.
58
59
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Current Position with the Company
Name and Age and Business Experience*
Roy L. Faulks Vice Chairman of the Board of the Company
(68) since 1981 and his current term will expire
in 1994; prior to retirement in April, 1986,
Executive Vice President and Treasurer of
The Seibels Bruce Group, Inc. ("Seibels")
and certain subsidiaries; Director of
Seibels and certain subsidiaries.
Donald W. Feddersen Director of the Company since 1983 and his
(59) current term will expire in 1996; General
Partner of Charles River Ventures, Boston,
Massachusetts; Director of Network Systems
Corporation, Brooklyn Park, Minnesota;
Director of Parametric Technology
Corporation, Waltham, Massachusetts;
Director of Sybase, Inc., Emeryville,
California.
Frederick B. Karl Director of the Company since 1981 and his
(69) current term will expire in 1994; Attorney
at Law and Chief Executive Officer of
Hillsborough County, Florida since 1990;
prior thereto, Senior Partner of Karl,
McConnaughhay, Roland and Maida, P.A., a law
firm in Tallahassee, Florida from 1978
through 1990; Justice of the Florida Supreme
Court from 1977 to 1978.
Dr. John M. Palms Director of the Company since 1992 and his
(58) current term will expire in 1995; President
of the University of South Carolina since
March, 1991; President of Georgia State
University, 1989 to March 1991; prior
thereto, various teaching and administration
positions at Emory University; Director of
PECO Energy, Inc., Philadelphia,
Pennsylvania; Director of Fortis Holding,
Inc., New York, New York; Director of
NationsBank of South Carolina, N.A.,
Columbia, South Carolina; Trustee, Institute
of Defense Analysis, Alexandria, Virginia.
* For directors only, includes certain other directorships.
59
60
Current Position with the Company
Name and Age and Business Experience*
Joseph D. Sargent Director of the Company since 1986 and his
(64) current term will expire in 1995; Chairman
of Connecticut Surety Corporation and Vice
Chairman of Conning & Company, Hartford,
Connecticut; Chairman of the Board and
Treasurer of S.K.I., Ltd., Killington,
Vermont; Director of Trenwick Group, Inc.,
Stamford, Connecticut; Director of Mutual
Risk Management, Ltd., Hamilton, Bermuda;
Director of EW Blanch Holdings, Inc.,
Minneapolis, Minnesota; Director of
Executive Risk Inc., Simsbury, Connecticut;
Director if MMI Companies, Inc., Deerfield,
Illinois.
John P. Seibels Director of the Company since 1981 and his
(52) current term will expire in 1996; Investor,
Columbia, South Carolina; Director of
Seibels and certain subsidiaries.
Richard G. Trub Director of the Company since 1981 and his
(63) current term will expire in 1994; Chairman
and Treasurer of Trubco, Inc., West
Simsbury, Connecticut, since June, 1992;
prior thereto, Senior Vice President of
Connecticut National Bank, Hartford,
Connecticut; Director of Riverfront
Recapture, Inc., Hartford, Connecticut.
G. Larry Wilson Chairman of the Board (since 1985),
(47) President and Chief Executive Officer of the
Company (since 1980) and his current term as
Director will expire in 1995; Director of
LEGENT Corporation, Vienna, Virginia.
Employed by the Company since its inception.
*For directors only, includes certain other directorships.
60
61
Current Position with the Company
Name and Age and Business Experience*
David T. Bailey Executive Vice President of the Company
(47) since 1986. Responsible for the Property and
Casualty Insurance Group. Employed by the
Company since 1981.
Jeffery S. Bragg Senior Vice President of the Company since
(45) 1993. Responsible for the Health and
Information Services Group. Employed by the
Company since 1987.
James P. Brown Senior Vice President of the Company since
(47) 1992. Responsible for the Total Policy
Management Group since February 1994.
Employed by the Company since 1982.
Charles E. Callahan Executive Vice President of the Company
(45) since 1989. Responsible for the Life, Health
& Information Services Group. Employed by
the Company since 1983.
Donald A. Coggiola Executive Vice President of the Company
(54) since 1986. Responsible for the Industry
Markets Group. Employed by the Company
since 1979.
Robert L. Gresham Executive Vice President (since 1986) and
(51) Treasurer (since 1981) of the Company.
Responsible for the Corporate Services
Group. Employed by the Company since 1978.
Stephen G. Morrison Executive Vice President, Secretary and
(44) General Counsel since January 1994.
Responsible for the administration of the
legal affairs of the Company. Employed by
the Company since January 1994. Prior to
joining the Company, Mr. Morrison was
engaged full time in the practice of law as
Senior Partner with Nelson, Mullins, Riley &
Scarborough in Columbia, South Carolina. In
that capacity, Mr. Morrison served as the
Company's chief outside litigation counsel
for matters other than those described in
Note 8 to the Financial Statements. Mr.
Morrison will continue his affiliation with
Nelson, Mullins, Riley & Scarborough and
continue to perform certain services in that
capacity on a declining basis.
* For directors only, includes certain other directorships.
61
62
Current Position with the Company
Name and Age and Business Experience*
Timothy V. Williams Executive Vice President and Chief Financial
(44) Officer. Responsible for the Financial
Services Group. Employed by the Company
since February 1994. Prior thereto, Mr.
Williams served in senior management
capacities with Holiday Inn Worldwide, based
in Atlanta, Georgia, most recently as
Executive Vice President of Corporate
Services and Chief Financial Officer.
In April of 1994, the Company was informed by Mr. Coggiola
that a gift of 380 shares of Common Stock was erroneously reported
as a gift of 400 shares in a Form 4 which was filed in April of
1991. This minor discrepancy was reflected only in this single
Form 4.
* For directors only, includes certain other directorships.
62
63
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS: Directors who are not full-time
employees of the Company receive an annual fee of $2,000, plus
$2,000 for each Board meeting attended and $750 for each committee
meeting attended on other than a regular Board meeting date.
Directors participating in any meeting by telephone receive a $250
fee for such meeting. Directors who do not reside in Columbia,
South Carolina, are reimbursed for travel expenses.
COMPENSATION OF EXECUTIVE OFFICERS: The following table sets
forth information regarding compensation earned, including stock
options granted, during 1991, 1992 and 1993 by the executive
officers listed in the table (the "Executive Group").
SUMMARY COMPENSATION TABLE
Long Term Compensation
Awards Payouts
Number of
Name Securities Long-Term All
and Underlying Incentive Other
Principal Annual Compensation Options Plan Compen-
Position Year Salary Bonuses (1) Granted Payouts sation (2)
G. Larry Wilson 1993 $496,930 $ 50,000 100,000 $ -0- $7,284
President 1992 456,940 234,000 50,000 1,196,000 6,198
1991 417,312 218,000 50,000 -0- -
David T. Bailey 1993 280,482 -0- 50,000 -0- 7,075
Executive Vice 1992 260,540 98,250 25,000 777,400 8,700
President 1991 241,615 83,835 25,000 -0- -
Charles E. Callahan 1993 245,538 -0- 50,000 -0- 6,641
Executive Vice 1992 213,538 86,400 25,000 598,000 6,075
President 1991 183,307 73,600 25,000 -0- -
Donald A. Coggiola 1993 279,546 -0- 50,000 -0- 7,075
Executive Vice 1992 260,540 86,329 25,000 777,400 8,700
President 1991 241,615 60,750 25,000 -0- -
Robert L. Gresham 1993 265,326 -0- 50,000 -0- 6,805
Executive Vice 1992 243,308 98,000 25,000 777,400 6,198
President 1991 221,615 89,200 25,000 -0- -
<FN>
(1) Reflects amount earned in year indicated even though actually
paid in following year and for Mr. Wilson includes amounts
earned under his Executive Compensation Agreement (see
"Executive Compensation Agreement").
63
64
(2) Disclosure under this column is not required for 1991 under
the rules of Securities and Exchange Commission. Amounts
shown are matching contributions from the Company under its
401(k) retirement savings plan.
The following tables set forth certain information regarding
options for Common Stock granted to the Executive Group during 1993
and include the potential realizable value which would exist based
on assumed annual compounded rates of stock price appreciation of
five and ten percent over the full ten-year term of the options.
OPTIONS GRANTED IN 1993
Individual Grants
Percent
Number of Total
of Securities Options Exercise
Underlying Granted to Price Expiration
Options Employees Per Date of
Name Granted (1) in 1993 Share Options
All Stockholders - - - -
G. Larry Wilson 100,000 16.8% $81.90 January 19, 2003
David T. Bailey 50,000 8.4% 81.90 January 19, 2003
Charles E. Callahan 50,000 8.4% 81.90 January 19, 2003
Donald A. Coggiola 50,000 8.4% 81.90 January 19, 2003
Robert L. Gresham 50,000 8.4% 81.90 January 19, 2003
<FN>
(1) All option grants shown in these tables are pursuant to the
Company's 1993 Long-Term Incentive Plan for Executives.
Options granted under the plan in 1993 have an exercise price
of 105% of the fair market value of the Common Stock on
January 19, 1993 (the date of grant) and become exercisable
as follows: 25% on January 1, 1995; 25% on January 1, 1997;
and 50% on January 1, 1999. If there is a change in control
of the Company, as defined in this plan, then each option
granted under the plan shall become immediately exercisable
in full regardless of whether there is a change in office or
employment of the participant. In addition, in the event of
dissolution or liquidation of the Company or any merger or
combination in which the Company is not the surviving entity,
then each option granted shall terminate, but not before each
participant is permitted to exercise his options to the
extent they are exercisable, without regard to any
installment exercise provisions in the plan.
64
65
Potential Realizable Value at
Assumed Annual Rates of Stock Price
Appreciation for Option Term
Name 5% 10%
All Stockholders (2) $1,154,116,972 $2,924,939,465
G. Larry Wilson $ 4,515,000 $ 12,041,000
David T. Bailey 2,257,500 6,020,500
Charles E. Callahan 2,257,500 6,020,500
Donald A. Coggiola 2,257,500 6,020,500
Robert L. Gresham 2,257,500 6,020,500
(2) The potential realizable value for all Stockholders is based
on the number of shares of Common Stock outstanding on
January 19, 1993 (the date these options were granted) and
assumes the Stockholders purchased the Common Stock for
$78.00 (which was the market price of the Common Stock on
January 19, 1993) and held the Common Stock until January 19,
2003. The Company has included this information to
illustrate how the Stockholders will have fared compared to
each of the named executives if the assumed appreciation is
achieved.
The following table sets forth information regarding the
value of "in-the-money" options, which are options having a
positive difference between the exercise price of such stock option
and the 1993 year-end market price of Common Stock. None of the
officers in the Executive Group exercised options during 1993.
AGGREGATED YEAR-END OPTION VALUES
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at December 31, 1993 at December 31, 1993 (1)
Name Exercisable Unexercisable Exercisable Unexercisable
G. Larry Wilson 149,999 150,001 $ -0- $ -0-
David T. Bailey 49,999 75,001 $ -0- $ -0-
Charles E. Callahan 31,666 75,001 $ -0- $ -0-
Donald A. Coggiola 84,999 75,001 $ 75,000 $ -0-
Robert L. Gresham 49,999 75,001 $ -0- $ -0-
<FN>
(1) Value represents the aggregate excess of the market price of
the Common Stock on December 31, 1993, which was $31.00, over
the exercise price for the options. All options included in
65
66
the table have an exercise price equal to the fair market
value of the Common Stock on the dates of grant, except those
granted pursuant to the Company's 1993 Long Term Incentive
Plan for Executives, which are described in the Options
Granted in 1993 Tables.
EXECUTIVE COMPENSATION AGREEMENT: The Company has an Executive
Compensation Agreement with G. Larry Wilson whereby the Company is
to pay, subject primarily to Mr. Wilson's continued employment,
certain specified amounts over a five-year period. This Agreement
is renewable annually at the option of the Company. A payment of
$50,000 for 1993 was paid in early 1994.
DEFERRED COMPENSATION AGREEMENT: G. Larry Wilson is covered
by a Deferred Compensation Agreement providing annual remuneration
of $25,000.00 upon the event of a qualifying retirement, death or
total disability. The Agreement, which provides for monthly
payments over a fifteen-year period, is contingent primarily upon
Mr. Wilson's continued employment until such an event occurs, and
the deferred benefits are not vested until that time. 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 had Employment Agreements
with Messrs. Wilson, Bailey, Callahan, Coggiola and Gresham which
provided for payments to be made to the individuals in certain
circumstances following a change of control of the Company. During
1993, there were no events which would entitle any of the
individuals to any post-termination benefits. All of these
Employment Agreements expired at the end of 1993.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
STOCK OWNERSHIP OF DIRECTORS AND OFFICERS: The following
table sets forth beneficial ownership of Common Stock by each
Director and the executive officers named in the Summary
Compensation Table and by all Directors and all executive officers
as a group. No one Director owns one percent or more of the
outstanding shares, but in the aggregate, the Directors and
executive officers beneficially own two percent.
66
67
Amount & Nature
Name & Address of Beneficial Shares Subject
of Beneficial Owner (1) Ownership (2) to Option (3)
Roy L. Faulks 3,999 3,499
Donald W. Fedderson 8,366 8,366
Frederick B. Karl 3,000 2,500
Dr. John M. Palms 833 833
Joseph D. Sargent 2,500 2,500
John P. Seibels 13,499 8,333
Richard G. Trub 2,700 2,500
G. Larry Wilson 191,436 (4) 149,999
David T. Bailey 50,816 (5) 49,999
Charles E. Callahan 31,984 (6) 31,666
Donald A. Coggiola 90,243 (7) 84,999
Robert L. Gresham 57,108 (8) 49,999
Directors and Executive
Officers as a group 483,379 420,859
(1) The address of each individual is the Company's address.
(2) Except where noted below, each individual has sole voting and
sole dispositive power.
(3) These shares, which are included in the "Amount & Nature of
Beneficial Ownership" column, are subject to option on or
before June 30, 1994, pursuant to the Company's various stock
option plans.
(4) 1,437 of these shares are held in the Company's 401(k)
Retirement Savings Plan for which Mr. Wilson has sole
dispositive power but no voting power.
(5) 151 of these shares are held in the Company's 401(k)
Retirement Savings Plan for which Mr. Bailey has sole
dispositive power but no voting power.
(6) 318 of these shares are held in the Company's 401(k)
Retirement Savings Plan for which Mr. Callahan has sole
dispositive power but no voting power.
(7) 452 of these shares are held in the Company's 401(k)
Retirement Savings Plan for which Mr. Coggiola has sole
dispositive power but no voting power.
(8) 345 of these shares are held in the Company's 401(k)
Retirement Savings Plan for which Mr. Gresham has sole
dispositive power but no voting power.
67
68
PRINCIPAL STOCKHOLDERS: The following table sets forth
certain information regarding beneficial owners of more than five
percent of the Company's Common Stock. The information provided,
except that for IBM, is based on information filed by the
respective party with the Securities and Exchange Commission.
Name Common Stock Percentage
and Address Beneficially Owned of Class (1)
International Business 3,797,561 (2) 16.78%
Machines Corporation ("IBM")
2000 Purchase Street
Purchase, New York 10577
The Capital Group, Inc. 2,214,000 (3) 9.78%
("Capital")
333 South Hope Street
Los Angeles, California 90071
Wellington Management Company 2,024,640 (4) 8.94%
("Wellington")
75 State Street
Boston, Massachusetts 02109
The Regents of the University 1,353,200 (5) 5.98%
of California ("Regents")
300 Lakeside Drive
Office of the Treasurer
Oakland, California 94612
Government of Singapore 1,264,800 (6) 5.59%
Investment Corporation
Pte Ltd. ("Singapore")
250 North Bridge Road
#33-00 Raffles City Tower
Singapore 0617
(1) Based on number of shares outstanding at year-end.
(2) Of the shares reported, IBM has sole voting power and sole
dispositive power for all of the shares.
(3) Of the shares reported, Capital has sole voting power for
1,099,400 of the shares, shared voting power for none of the
shares and sole dispositive power for all of the shares.
Capital Guardian Trust Company and Capital Research and
Management Company, operating subsidiaries of Capital,
exercised as of December 31, 1993, investment discretion with
respect to 2,014,000 and 200,000 shares, respectively, of
outstanding shares which were owned by various institutional
investors.
68
69
(4) Of the shares reported, Wellington has sole voting power for
none of the shares, shared voting power for 1,131,140 of the
shares, and shared dispositive power for all of the shares.
(5) Of the shares reported, Regents has sole voting power and sole
dispositive power for all of the shares.
(6) Of the shares reported, Singapore has shared voting power and
shared dispositive power for all of the shares. Of the shares
held by Singapore, the Government of Singapore is beneficial
owner of 912,400 for which it has shared voting and shared
dispositive power, and the Monetary Authority of Singapore is
beneficial owner of 352,400 for which it has shared voting and
shared dispositive power.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During calendar year 1993 the Company and its subsidiaries paid
to IBM and its subsidiaries $6.6 million for computer hardware,
programs and services and received $10.4 million from IBM and its
subsidiaries for computer software and services.
During 1993, Connecticut Surety Corporation, of which Mr.
Sargent is a director and was during 1993 an executive officer and
of which Mr. Trub was during 1993 a director, received software
licenses and data processing and information services from the
Company for which it paid the Company approximately $256,000.
The Company considers such dealings with IBM and Connecticut
Surety Corporation to have been on substantially similar terms as
those prevailing at the time for comparable transactions with
unrelated third parties.
69
70
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
Financial Statements and Schedules
The following consolidated financial statements of Policy
Management Systems Corporation are included in Item 8 (Page 30 to
35):
Report of Independent Accountants.
Consolidated Balance Sheet as of December 31, 1993 and 1992.
Consolidated Statement of Operations for the year ended
December 31, 1993.
Consolidated Statement of Changes in Stockholders'
Equity for the year ended December 31, 1993.
Consolidated Statement of Cash Flows for the year
ended December 31, 1993.
Notes to Consolidated Financial Statements for the
year ended December 31, 1993.
The following Consolidated Financial Statement Schedules are
included in Item 14 (Page 53 to 57):
Schedule I - Marketable Securities
Schedule V - Property and Equipment
Schedule VI - Accumulated Depreciation and Amortization
Schedule VIII - Valuation and Qualifying Accounts
Schedule X - Supplementary Income Statement Information
Exhibits Filed
Exhibits required to be filed with this Annual Report on Form
10-K 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, 1993 is incorporated herein by
reference.
Form 8-K
The Company filed a report on Form 8-K, dated December 8, 1993
under Item 5. Other events, relating to a letter issued to the
Company's stockholders, customers and employees, advising them of
recent developments in connection with the Company's audit and its
business.
70
71
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Policy Management Systems Corporation
Our report, which includes two emphasis paragraphs discussing
errors in previously issued financial statements and litigation
and a Securities and Exchange Commission investigation, on the
consolidated financial statements of Policy Management Systems
Corporation and subsidiaries is included on page 31 of this Form
10-K. In connection with our audits of such financial
statements, we have also audited the related financial statement
schedules listed in the index on page 30 of this Form 10-K.
In our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material
respects, the information required to be included therein.
Atlanta, Georgia Coopers & Lybrand
April 5, 1994
71
72
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
Timothy V. Williams, Executive Vice
President, Chief Financial Officer
DATE April 6, 1994
BY (SIGNATURE) /s/ Stan F. Stoudenmire
Stan F. Stoudenmire, Vice President
and Controller
DATE April 6, 1994
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, President and Chief Executive
Officer
DATE April 6, 1994
BY (SIGNATURE) /s/ Roy L. Faulks
(NAME AND TITLE) Roy L. Faulks, Vice Chairman of the
Board of Directors
DATE April 6, 1994
BY (SIGNATURE) /s/ John P. Seibels
(NAME AND TITLE) John P. Seibels, Director
DATE April 6, 1994
BY (SIGNATURE) /s/ Frederick B. Karl
(NAME AND TITLE) Frederick B. Karl, Director
DATE April 6, 1994
BY (SIGNATURE) /s/ Richard G. Trub
(NAME AND TITLE) Richard G. Trub, Director
DATE April 6, 1994
72
73
SIGNATURES
BY (SIGNATURE) /s/ Donald W. Feddersen
(NAME AND TITLE) Donald W. Feddersen, Director
DATE April 6, 1994
BY (SIGNATURE) /s/ Joseph D. Sargent
(NAME AND TITLE) Joseph D. Sargent, Director
DATE April 6, 1994
BY (SIGNATURE) /s/ Dr. John M. Palms
(NAME AND TITLE) Dr. John M. Palms, Director
DATE April 6, 1994
73