PAGE <1>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 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 (I.R.S. 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
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
22,574,656 Common shares, $.01 par value, as of April 30, 1993
The information furnished herein reflects all adjustments which
are, in the opinion of management, necessary for the fair presentation
of the results for the periods reported. Such information should be
read in conjunction with the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.
PAGE <2>
POLICY MANAGEMENT SYSTEMS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Income for the
three months ended March 31, 1993 and 1992.......... 3
Consolidated Balance Sheets as of
March 31, 1993 and December 31, 1992................ 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 1993 and 1992.......... 5
Notes to Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations................................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................. 13
Item 4. Submission of Matters to a Vote of
Security Holders................................ 13
Item 6. Exhibits and Reports on Form 8-K.................. 13
Signatures................................................... 14
INTRODUCTORY NOTE
THE INFORMATION CONTAINED HEREIN HAS BEEN RESTATED IN NOVEMBER
1994 TO REFLECT ADJUSTMENTS RESULTING FROM SPECIAL AUDITS OF THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS (SEE NOTE 2 OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS). UNLESS OTHERWISE STATED,
HOWEVER, INFORMATION CONTAINED HEREIN IS AS OF MARCH 31, 1993.
PAGE <3>
PART I
FINANCIAL INFORMATION
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months
Ended March 31,
1993 1992
(Restated) (Restated)
(In Thousands, Except
Per Share Data)
Revenues:
Licensing....................................... $ 19,855 $ 17,793
Services........................................ 99,360 99,655
119,215 117,448
Costs and Expenses:
Employee compensation and benefits.............. 39,597 41,692
Computer and communications expense............. 10,877 10,295
Information services and data acquisition
costs......................................... 26,928 21,971
Other operating costs and expenses.............. 26,496 25,777
103,898 99,735
Operating income.................................. 15,317 17,713
Other Income and Expenses:
Investment income............................... 3,329 2,993
Gain on sale of marketable securities........... 2,936 156
Interest expense and other charges.............. (339) (356)
5,926 2,793
Income before income taxes........................ 21,243 20,506
Income taxes...................................... 7,618 6,666
Net income........................................ $ 13,625 $ 13,840
Net income per share.............................. $ .58 $ .60
Weighted average number of shares................. 23,534 23,115
See accompanying notes.
PAGE <4>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1993 1992
(Unaudited) (Audited)
(As restated) (As restated)
(In Thousands, Except
Share Data)
Assets
Current assets:
Cash and equivalents.................................. $111,057 $ 31,959
Marketable securities................................. 119,957 206,562
Receivables, net of provisions for uncollectible
amounts of $1,447 ($1,630 at 1992).................. 98,333 86,479
Income tax receivable................................. 3,196 2,891
Deferred income taxes................................. 6,741 8,083
Other................................................. 10,073 7,939
Total current assets............................... 349,357 343,913
Property and equipment, at cost less accumulated
depreciation & amortization of $83,131
($83,730 at 1992)..................................... 143,655 131,696
Receivables............................................. 16,794 22,252
Goodwill and other intangible assets.................... 100,312 100,792
Capitalized software costs.............................. 103,445 99,414
Deferred income taxes................................... - 2,580
Other................................................... 5,652 6,295
Total assets.................................... $719,215 $706,942
Liabilities
Current liabilities:
Accounts payable and accrued expenses................. $ 40,883 $ 37,022
Accrued contract termination costs.................... 3,179 4,008
Current portion of long-term debt..................... 2,958 3,670
Income taxes payable.................................. 155 -
Unearned revenues..................................... 10,556 11,500
Other................................................. 961 1,026
Total current liabilities.......................... 58,692 57,226
Long term debt.......................................... 6,153 6,001
Deferred income taxes................................... 53,347 56,112
Other................................................... 7,082 8,527
Total liabilities............................... 125,274 127,866
Stockholders' Equity
Special stock, $.01 par value, 5,000,000
shares authorized..................................... - -
Common stock, $.01 par value, 75,000,000 shares
authorized, 23,544,824 shares issued and outstanding
(23,524,197 at 1992).................................. 235 235
Additional paid-in capital.............................. 308,927 307,906
Retained earnings....................................... 286,391 272,766
Foreign currency translation adjustment................. (1,612) (1,831)
Total stockholders' equity......................... 593,941 579,076
Total liabilities and stockholders' equity...... $719,215 $706,942
<FN>
See accompanying notes.
PAGE <5>
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
1993 1992
(Restated) (Restated)
(In Thousands)
Operating Activities
Net income............................................... $ 13,625 $ 13,840
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 15,892 12,887
Deferred income taxes................................. 211 960
Gain on sale of marketable securities................. (2,936) (156)
Changes in assets and liabilities:
Receivables........................................... (5,911) (2,228)
Income tax receivable................................. - 421
Accounts payable and accrued expenses................. 5,863 5,400
Income taxes payable.................................. 510 666
Other, net............................................... (5,552) 1,135
Cash provided by operations......................... 21,702 32,925
Investing Activities
Proceeds from sales/maturities of marketable
securities, net........................................ 187,465 16,416
Purchases of marketable securities, net.................. (99,219) (31,086)
Acquisition of property and equipment.................... (25,028) (23,462)
Capitalized internal software development costs.......... (5,532) (6,338)
Purchased software....................................... (1,235) (838)
Proceeds from disposal of property & equipment........... 6,950 44
Business acquisitions.................................... (2,840) (2,194)
Cash provided (used) by investing activities........ 60,561 (47,458)
Financing Activities
Payments on long term debt............................... (3,673) (28)
Issuance of common stock under stock option plans........ 663 2,990
Cash provided (used) by financing activities........ (3,010) 2,962
Effect of exchange rate changes on cash.................... (155) -
Net increase (decrease) in cash and equivalents............ 79,098 (11,571)
Cash and equivalents at beginning of period................ 31,959 39,609
Cash and equivalents at end of period...................... $111,057 $ 28,038
Noncash Activities
Long-term debt arising from and assumed in connection
with business acquisition.............................. $ 2,987 $ 2,187
Supplemental Information
Interest paid............................................ 278 207
Income taxes paid........................................ 6,535 4,534
<FN>
See accompanying notes.
PAGE <6>
POLICY MANAGEMENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1993
(Unaudited)
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.
The consolidated balance sheet as of December 31, 1992 has
been audited and is restated herein. The consolidated statements
of operations and cash flows for the three months ended March 31,
1993 and 1992 have been restated by the Company, without audit, to
conform to the adjustments to the Company's retained earnings as of
December 31, 1992, as discussed in Note 2. These adjustments
include all adjustments which are, in the opinion of management,
necessary to state fairly the results for the period presented.
NOTE 2. RESTATEMENT OF RESULTS OF OPERATIONS
In August 1993, the Company engaged independent accountants to
conduct 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. 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 (see Note 2
of Notes to Consolidated Financial Statements in the Company's
Annual Report on Form 10-K for the year ended December 31, 1993).
In February 1994, the Company engaged independent accountants
to audit the Company's consolidated financial statements as of and
for the twelve months ended December 31, 1993 and 1992.
As a result of the audit of the Company's consolidated
financial statements as of and for the twelve months ended December
31, 1993 and 1992, the Company determined the specific period or
periods affected by the above adjustments. The components (net of
PAGE <7>
related tax effects) of the adjustment to previously reported net
income for the three months ended March 31, 1993 and 1992, are as
follows:
Increase (Decrease)
to Net Income
(In Thousands)
Deferral of revenues due to changes in
timing of revenue recognition................ $3,190 $ 233
Reduction of expenses due to capitalization
of certain software costs.................... 335 471
Recognition of expenses due to changes in
timing of expense accrual.................... (738) (867)
Reserve for losses on certain
services contracts........................... 1,057 (210)
Reduction of current income tax liability due
to previously unrecorded tax credits......... - 498
Net income adjustment for the three months
ended March 31, 1993 and 1992................ $3,844 $ 125
After giving effect to these adjustments, the principle
elements of the Company's consolidated statements of income for the
three months ended March 31, 1993 and 1992, were restated as
follows:
Three Months Ended
March 31, 1993
(As Previously
Reported) (Restated)
(In Thousands)
Revenues......................... $120,410 $119,215
Operating income................. 8,570 15,317
Other income and expenses, net... 5,947 5,926
Income before income taxes....... 14,517 21,243
Net income....................... 9,781 13,625
Net income per share............. .42 .58
Three Months Ended
March 31, 1992
(As Previously
Reported) (Restated)
(In Thousands)
Revenues......................... $116,078 $117,448
Operating income................. 18,324 17,713
Other income and expenses, net... 2,784 2,793
Income before income taxes....... 21,108 20,506
Net income....................... 13,715 13,840
Net income per share............. .59 .60
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; (iii)
PAGE <8>
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.
NOTE 3. SUBSEQUENT EVENTS
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 is 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 the investigation.
NOTE 4. CHANGES IN ESTIMATED USEFUL LIVES
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 $970,000 ($.03 per
PAGE <9>
share) during the three months ended March 31, 1993.
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 $5,126,000 for the
three months ended March 31, 1993. As a result of this change in
estimated life, amortization expense was $441,000 ($.01 per share)
less than it would have been using the previous four-year life for
the three months ended March 31, 1993.
NOTE 5. STOCK REPURCHASE
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.
PAGE <10>
POLICY MANAGEMENT SYSTEMS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The consolidated balance sheet as of December 31, 1992 has
been audited and is restated herein. The consolidated statements
of operations and cash flows for the three months ended March 31,
1993 and 1992 have been restated by the Company, without audit, to
conform to the adjustments to the Company's retained earnings as of
December 31, 1992, as discussed in Note 2 of Notes to Consolidated
Financial Statements. These adjustments include all adjustments
which are, in the opinion of management, necessary to state fairly
the results for the period presented.
Liquidity and Capital Resources
The $7.5 million decrease in cash and equivalents and current
marketable securities between December 31, 1992 and March 31, 1993
was primarily attributable to the following significant
nonrecurring expenditures: business and software product
acquisitions, including debt and contingent payments relating to
business acquisitions, ($8.2 million); acquisition of data
processing and communications equipment, support software and
office furniture, fixtures and equipment used in the Company's
operations ($23.4 million); and payments for construction of
additional office and dining facilities at the Company's corporate
headquarters in Columbia, South Carolina ($.9 million).
Significant nonrecurring expenditures anticipated for the
remainder of 1993 are as follows: acquisition of data processing
and communications equipment, support software and office
furniture, fixtures and equipment ($8.5 million); acquisition of
software products and debt payments relating to past business
acquisitions ($6.7 million); and completion of construction of
additional dining facilities at the Company's corporate
headquarters ($1.2 million). The Company believes that current
cash and investment reserves and cash to be provided by operations
will be sufficient to satisfy its existing and presently
anticipated operating and capital resource needs.
Results of Operations
Set forth below are certain operating items expressed as
a percentage of revenues and the percent increase (decrease) for
those items between the periods presented:
PAGE <11>
Percent
Percentage Increase
of Revenues (Decrease)
Three Months Three Months
Ended March 31, Ended March 31,
1993 1992 1993 vs 1992
Revenues................ 100.0 100.0 1.5
Operating income........ 12.8 15.1 (13.5)
Income before income
taxes................. 17.8 17.5 3.6
Income taxes............ 6.4 5.7 14.3
Net income.............. 11.4 11.8 ( 1.6)
The increase in total revenues for the first quarter of 1993
over the corresponding quarter of 1992 of 1.5% was significantly
less than the Company's normal growth trend. This was primarily
attributable to revenues from both new business, systems licensing
and services, and project implementation services from existing
customers being lower than projected for the 1993 first quarter,
with the sharpest deviation from planned results occurring in the
health component of the Company's business. The Company expects
uncertainty surrounding health care reform and difficult industry
conditions to continue to adversely impact its financial results.
Revenues from systems licensing were $19.9 and $17.8 million
for the three months ended March 31, 1993 and 1992, respectively,
representing 16.7% and 15.1% of total revenues. The increase
between 1993 and 1992 results primarily from an increase in initial
license revenues of $1.2 million and a $.8 million increase in
revenues from continuing monthly license charges for maintenance,
enhancements and services availability ("MESA") and for continuing
right-to-use licenses.
Total services revenues for the three months ended March 31,
1993 decreased $.3 million (.3%) compared to the corresponding
period in 1992.
Revenues from professional and outsourcing services decreased
$9.7 million (15.5%) to $52.5 million for the first quarter in 1993
from $62.1 million for the corresponding quarter in 1992, due
primarily to a reduction in professional services provided by the
Company's health insurance systems business and total policy
management services, principally related to the New Jersey Market
Transition Facility (MTF) project.
Revenues from information services were $42.9 million for the
first quarter in 1993 compared with $37.3 million for the
corresponding quarter in 1992. This $5.6 million increase (14.9%)
is primarily attributable to an increase in business associated
with automobile property and casualty information services and life
information services.
PAGE <12>
The operating margin for the three months ended March 31, 1993
was 12.8%, compared to 15.1% for the corresponding period in 1992.
The decline in the operating margin was primarily attributable to
lower than projected revenues as explained above. Employee
compensation and benefits decreased slightly as a result of a
reduction in the number of employees in certain areas of the
Company's operations and a decrease in performance bonus expense.
The increase in information services and data acquisition costs
resulted primarily from an increase in the volume of state fees for
motor vehicle reports, relating to new business and normal growth
in the property and casualty information services business.
Other income and expenses for the three months ended March 31,
1993 and 1992 include a gain on the sale of marketable securities
of $2.9 and $.2 million, respectively.
The effective income tax rate (income taxes expressed as a
percentage of pre-tax income) was 35.9% and 32.5% for the three
months ended March 31, 1993 and 1992, respectively. The increase
in the effective rate between the periods was due primarily to an
increase in amortization of goodwill relating to business
acquisitions, which is not deductible for income tax purposes.
PAGE <13>
PART II
OTHER INFORMATION
POLICY MANAGEMENT SYSTEMS CORPORATION
Items 2, 3 and 5 are not applicable.
Item 1. Legal Proceedings
See Note 3, "Subsequent Events", of Notes to Consolidated
Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders, held April 27, 1993,
the Company's stockholders approved the Company's 1993 Long-Term
Incentive Plan for Executives (18,353,483 votes for, 1,404,114
votes against, 233,100 abstentions and 2,368,044 broker
non-votes). Additionally, the Company's stockholders approved a
proposal to amend the Company's 1989 Stock Option Plan to increase
the number of shares of $ .01 par value Common Stock reserved for
issuance under said plan from 1,200,000 shares to 2,500,000 shares
(16,366,842 votes for, 1,508,870 votes against, 244,355 abstentions
and 4,239,674 broker non-votes).
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
There are no exhibits required to be filed with this Quarterly
Report on Form 10-Q.
Reports on Form 8-K
The Company filed a report on Form 8-K, dated January 19, 1993
under Item 4. Changes in Registrant's Certifying Accountant,
relating to the change in the Company's principal independent
auditors.
PAGE <14>
POLICY MANAGEMENT SYSTEMS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
POLICY MANAGEMENT SYSTEMS CORPORATION
(Registrant)
Date: November 17, 1994 By: Timothy V. Williams
Executive Vice President
(Chief Financial Officer)