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POLICY MANAGEMENT SYSTEMS CORPORATION
POST OFFICE BOX TEN
COLUMBIA, SOUTH CAROLINA 29202
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 10, 1995
TO THE STOCKHOLDERS OF
POLICY MANAGEMENT SYSTEMS CORPORATION:
NOTICE IS HEREBY GIVEN to the stockholders that the Annual Meeting
of Stockholders ("Meeting") of Policy Management Systems
Corporation ("Company") will be held at the offices of the Company
at One PMS Center, Blythewood, South Carolina, at 11:00 a.m., on
Wednesday, May 10, 1995, for the following purposes:
(1) To elect three Directors of the Company to hold office for a
term of three years and one director for a term of one year and
until their successors shall be duly elected and qualified or until
their earlier resignation, removal from office, or death;
(2) To consider and act upon the ratification of the selection of
independent auditors for 1995;
(3) To consider and act upon the approval of the (a) proposed
amendments to the Policy Management Systems Corporation 1989 Stock
Option Plan to increase the number of shares of $0.01 par value
Common Stock reserved for issuance under said plan by 2,250,000
shares, to permit optionees to exercise options not otherwise
exercisable in the event there is a change in control of the
Company, and to authorize the Board of Directors of the Company to
permit certain optionees to exercise options not otherwise
exercisable in the event the person resigns or retires from the
Company and (b) performance goal components within the Plan;
(4) To consider and act upon the approval of the Policy Management
Systems Corporation Employee Stock Purchase Plan; and
(5) To take such other action and transact such other business
which may properly and lawfully come before the Meeting or any
adjournment thereof;
all as set forth in the Proxy Statement accompanying this Notice.
The transfer books of the Company were closed as of the end of
business on March 16, 1995, the record date, for purposes of
determining stockholders entitled to notice of and to vote at the
Meeting, but were not closed for any other purpose.
STOCKHOLDERS ARE URGED TO COMPLETE AND EXECUTE THE ENCLOSED PROXY
AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE. NO POSTAGE IS
REQUIRED WHEN MAILED IN THE UNITED STATES. YOUR ATTENDANCE AT THE
MEETING IS URGED. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING,
PLEASE COMPLETE AND EXECUTE THE ENCLOSED PROXY. IF YOU ATTEND THE
MEETING AND DECIDE THAT YOU WANT TO VOTE IN PERSON, YOU MAY REVOKE
YOUR PROXY. YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE IN
FAVOR OF THE NOMINEES FOR DIRECTORS AND ALL OTHER PROPOSALS
DESCRIBED HEREIN TO BE CONSIDERED AT THE MEETING.
By Order of the Board of Directors
Stephen G. Morrison
April 6, 1995 Secretary
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POLICY MANAGEMENT SYSTEMS CORPORATION
POST OFFICE BOX TEN
COLUMBIA, SOUTH CAROLINA 29202
PROXY STATEMENT
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 10, 1995
General: This Proxy Statement is furnished to the holders of the
$.01 par value common stock ("Stockholders" and "Common Stock,
respectively) of Policy Management Systems Corporation ("Company")
in connection with the solicitation of proxies by the Board of
Directors of the Company to be voted at its Annual Meeting of
Stockholders ("Meeting") to be held at the offices of the Company,
One PMS Center, Blythewood, South Carolina, on Wednesday, May 10,
1995 at 11:00 a.m. It is anticipated that this Proxy Statement
will be mailed to Stockholders on or about April 6, 1995.
A proxy card is enclosed. Any Stockholder sending the enclosed
proxy to the Company has the power to revoke it at any time before
it is exercised by: (1) executing and delivering a valid proxy
bearing a later date; (2) delivering written notice of revocation
to Stephen G. Morrison, Secretary, Policy Management Systems
Corporation, Post Office Box Ten, Columbia, South Carolina 29202;
or (3) appearing at the Meeting and voting in person. When proxies
in the accompanying form are returned properly executed, the shares
represented by proxies which have not been revoked will be voted
according to the instructions noted thereon.
Unless otherwise specified, the proxies will be voted in favor of
the three nominees for election to the Board of Directors for a
term of three years, in favor of the one nominee for election to
the Board of Directors for a term of one year, in favor of the
ratification of the selection of Coopers & Lybrand as independent
auditors, in favor of approval of the amendments to the Policy
Management Systems Corporation 1989 Stock Option Plan ("Amendments
to the 1989 Stock Option Plan") together with the performance goal
components within that Plan and approval of the Policy Management
Systems Corporation Employee Stock Purchase Plan ("Stock Purchase
Plan"). The Board of Directors is not aware at this date of any
other matters that will come before the Meeting. If, however, any
other matters should properly come before the Meeting, it is the
intention of the persons named in the proxy to vote thereon in
accordance with their judgment.
Expenses of Solicitation: The cost of soliciting proxies will be
borne by the Company. Officers, Directors and employees of the
Company may solicit proxies by telephone, telegram or personal
interview. The Company has entered into an agreement with D.F.
King & Company, Inc. to assist with solicitation of proxies for the
Meeting for a fee estimated at $6,000 plus expenses.
Voting: Only holders of record of outstanding shares of Common
Stock as of the close of business on March 16, 1995, ("Record
Date") will be entitled to notice of and to vote at the Meeting.
Each share is entitled to one vote. On the Record Date, there were
19,362,984 shares of Common Stock outstanding. A majority of the
outstanding shares of Common Stock present in person or represented
by proxy will constitute a quorum of the Meeting. Abstentions and
broker non-votes are counted as being present for purposes of
attaining a quorum. The Company's Articles of Incorporation
("Articles") provide that the vote of the holders of a majority of
the shares having voting power, present in person or represented by
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proxy, shall decide questions before the Meeting, unless the
question is one which by express provision of applicable law, the
Articles or the Bylaws of the Company, a higher vote is required in
which case the express provision shall govern. As such, abstaining
shares are included in the determination of the total number of
shares having voting power, and therefore, have the same effect as
no votes on proposals. Broker non-votes are not considered as
shares having voting power and are therefore not counted as votes
cast on such proposals nor are they counted as votes for or against
such proposals. Broker non-votes occur when a nominee holding
shares for a beneficial owner votes on at least one proposal but
does not have authority to vote on certain other proposals.
In the election of Directors, each Stockholder has the right to
cumulate its votes and cast as many votes as the number of shares
held multiplied by the number of Directors to be elected for the
specified term, the same to be cast for any one nominee or
distributed among any two or more nominees for election for the
specified term. To exercise the right of cumulative voting a
Stockholder must declare the intent to do so prior to the beginning
of voting and, once having done so, all Stockholders shall
automatically have the right to cumulate their votes without any
further notice. In the event of cumulative voting, the persons
appointed proxies shall have authority to cast the votes
represented thereby for one nominee of the Board of Directors or
distribute such votes among any two or more nominees of the Board
of Directors to maximize the number of Board of Directors' nominees
elected. The three nominees for the three-year term receiving the
largest number of votes shall be elected to the three-year term and
the one nominee for the one-year term receiving the largest number
of votes shall be elected to the one-year term.
The ratification of the selection of independent auditors shall be
decided by the vote of the holders of a majority of the shares
having voting power, present in person or represented by proxy.
With respect to the approval of the Amendments to the 1989 Stock
Option Plan and the performance goal components therein and
approval of the Stock Purchase Plan, the affirmative votes of a
majority of the shares represented, in person or by proxy, at the
Meeting is required. Abstaining shares are included in the
determination of the total number of shares having voting power,
and therefore, have the same effect as no votes on Proxy Items
Number 3 and 4. Broker non-votes, for the reason mentioned above,
are not counted as votes cast on these two items and are not
counted as votes for or against such items.
Principal Stockholders: The following table sets forth certain
information based on Schedules 13D and 13G filed with the
Securities and Exchange Commission as of March 16, 1995, regarding
beneficial owners of more than five percent of the Company's Common
Stock.
PRINCIPAL STOCKHOLDERS
Name Common Stock Percentage
and Address Beneficially Owned of Class
The Capital Group
Companies, Inc. 1,858,200 (1) 9.6%
("Capital")
333 South Hope Street
Los Angeles, California 90071
Wellington Management
Company 1,680,535 (2) 8.7%
("Wellington")
75 State Street
Boston, Massachusetts 02109
GAP Coinvestment Partners 1,519,024 (3) 7.8%
("GAP Coinvestment")
General Atlantic Partners 14 L.P.
("General Atlantic")
125 East 56th Street
New York, New York 10022
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Name Common Stock Percentage
and Address Beneficially Owned of Class
Government of Singapore
Investment Corporation 1,422,800 (4) 7.4%
Pte Ltd. ("Singapore")
250 North Bridge Road
#33-00 Raffles City Tower
Singapore 0617
The Regents of the University 1,353,200 (5) 7.0%
of California ("Regents")
300 Lakeside Drive
Office of the Treasurer
Oakland, California 94612
Clover Capital Management,
Inc. ("Clover") 972,737 (6) 5.0%
11 Tobey Village Office Park
Pittsford, New York 14534
Nicholas Applegate Capital Management 964,603 (7) 5.0%
("Nicholas Applegate")
600 West Broadway
29th Floor
San Diego, California 92101
(1) Of the shares reported, Capital has sole voting power for
809,900 of the shares, shared voting power for none of the shares,
and sole dispositive power for all of the shares.
(2) Of the shares reported, Wellington has sole voting power for
none of the shares, shared voting power for 853,330 of the shares
and shared dispositive power for all of the shares.
(3) GAP Coinvestment and General Atlantic (collectively "General
Atlantic Investors") are members of a group, as defined in Rule
13d-5 of the General Rules and Regulations under the Securities
Exchange Act of 1934, as amended. Each of GAP Coinvestment and
General Atlantic has shared voting and shared dispositive power for
all of the shares.
(4) Of the shares reported, Singapore has shared voting and
dispositive power for all of the shares.
(5) Of the shares reported, Regents has sole voting and
dispositive power for all of the shares.
(6) Of the shares reported, Clover has sole voting and dispositive
power for 963,437 of the shares and shared voting and dispositive
power for 9,300 of the shares.
(7) Of the shares reported, Nicholas Applegate has sole voting
power for 262,077 of the shares, shared voting power for none of
the shares and sole dispositive power for all of the shares.
ELECTION OF DIRECTORS
(Proxy Item No. 1): Stockholders will vote on the election of
three Directors to serve a term of three years and one Director to
serve a term of one year and until their successors have been
elected and qualified or until their earlier resignation, removal
from office, or death. Joe M. Henson was elected to the Board of
Directors on November 4, 1994 to fill a vacancy on the Board in the
class of Directors whose term expires in 1996 and is nominated for
a term of one year in order to preserve the evenly-staggered terms
of the Directors. All of the nominees are currently members of the
Board of Directors.
The shares represented by the proxies solicited hereby will be
voted in favor of the election of the persons named below unless
authorization to do so is withheld by proxy. In the
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event any of the nominees should be unable to serve as Director, it
is the intention of the persons named in the proxies to cast the
votes represented by the proxies for the election of such other
person or persons as the Board of Directors may nominate.
Nominees for election to the Board of Directors are considered and
recommended by the Nominating Committee of the Board of Directors
(see "Committees of the Board of Directors"). The Board of
Directors considers the recommendations of the Committee and
recommends the nominees to the Stockholders. The Company has no
formal procedure whereby nominations are solicited from
Stockholders other than General Atlantic Investors' right to cause
the Nominating Committee to recommend a nominee for Director
pursuant to the Shareholder's Agreement dated April 26, 1994 (see
"Certain Transactions").
The following information is set forth with respect to the four
nominees for Director to be elected at the Meeting:
Principal Occupation for Past Five Years and
Name and Age Certain Other Directorships
Nominees to be elected for three-year term:
Dr. John M. Palms (59) Director of the Company since 1992;
President of the University of South
Carolina since March, 1991; prior
thereto President of Georgia State
University; Director of Peco Energy,
Inc., Philadelphia, Pennsylvania;
Director of Fortis Holding, Inc.,
New York, New York; Director of
NationsBank, N.A. (Carolinas),
Columbia, South Carolina; Trustee,
Institute of Defense Analysis,
Alexandria, Virginia.
Joseph D. Sargent (65) Director of the Company since 1986;
Chairman, Treasurer and Chief Financial
Officer of Connecticut Surety
Corporation and Director and Vice
Chairman of Conning & Company,
Hartford, Connecticut; Chairman of the
Board of S-K-I Limited, 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
of MMI Companies, Inc., Deerfield,
Illinois.
G. Larry Wilson (48) Director of the Company since 1981;
Chairman of the Board, President and
Chief Executive Officer of the Company;
Director of Legent Corporation
("Legent"), Herndon, Virginia.
Employed by the Company since its
inception.
Nominee to be elected for one-year term:
Joe M. Henson (61) Director of the Company since November
4, 1994; Director and, since February
1995, Chairman of Executive Committee
of Legent; prior thereto Chairman and
Chief Executive Officer of Legent;
Director of Promus Companies, Inc.,
Memphis, Tennessee.
Directors whose terms will expire in 1996:
John P. Seibels (53) Director of the Company since 1981;
Investor, Columbia, South Carolina;
Director of The Seibels Bruce Group,
Inc. ("Seibels") and certain
subsidiaries.
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Principal Occupation for Past Five Years and
Name and Age Certain Other Directorships
Steven A. Denning (46) Director of the Company since June 20,
1994; Managing General Partner of
General Atlantic Partners, a New York
based private investment firm, and
President of General Atlantic Service
Corporation, Greenwich, Connecticut;
Director of Legent, Herndon, Virginia;
Director of Davidson Associates,
Torrance, California; Director of
United Meridian Corporation, Houston,
Texas; Director of Echoing Green
Foundation, New York, New York;
Director of Compuware Corporation,
Farmington Hills, Michigan.
Directors whose terms will expire in 1997:
Roy L. Faulks (69) Vice Chairman of the Board of the
Company since 1981; prior to retirement
in April, 1986, Executive Vice
President and Treasurer of Seibels
and certain subsidiaries; Director of
Seibels and certain subsidiaries.
Frederick B. Karl (70) Director of the Company since
1981; President and Chief Executive
Officer of Tampa General Healthcare
since October, 1994, prior thereto,
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.
Richard G. Trub (64) Director of the Company since 1981;
Chairman and Treasurer of Trubco, Inc.,
West Simsbury, Connecticut, since June,
1992; prior thereto, Senior Vice
President of Connecticut National Bank,
Hartford, Connecticut.
The Board of Directors recommends that the Stockholders vote FOR
the nominees named above.
Committees of the board of directors: Among the standing
committees of the Board of Directors are the Audit, Compensation
and Nominating Committees.
The Audit Committee is composed of Messrs. Trub (Chairman), Karl,
Seibels and Sargent. The Committee's functions include
recommending independent auditors to be employed by the Company.
The Committee also reviews with the independent and internal
auditors their planned activities, audits and findings and reports
to the Board of Directors. The Audit Committee met eighteen times
during 1994.
The Compensation Committee is composed of Messrs. Denning
(Chairman), Henson, Karl and Sargent. The Committee's functions
include reviewing and recommending remuneration arrangements for
senior officers and members of the Board of Directors, adopting
compensation plans in which employees, officers and Directors are
eligible to participate and approving compensation guidelines for
employees of the Company. The Compensation Committee met four
times during 1994.
The Nominating Committee is composed of Messrs. Seibels (Chairman),
Henson, Palms and Wilson. The Committee's functions include
selecting and recommending nominees for election as new, additional
and replacement Directors and officers and reviewing the
performance of incumbent Directors and officers as to whether to
nominate them for re-election.
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The Nominating Committee will consider candidates for the Board
recommended by Stockholders if such recommendations are delivered
to the Company no later than: (a) with respect to an election to be
held at an annual meeting of Stockholders, ninety days in advance
of such meeting; and (b) with respect to an election to be held at
a special meeting of Stockholders for the election of Directors,
the close of business on the seventh day following the date on
which notice of such meeting is first given. Each such
recommendation shall set forth: (a) the name and address of the
Stockholder who intends to make the nomination and of the person or
persons to be nominated; (b) a representation that the Stockholder
is a holder of record of stock of the Company entitled to vote at
such meeting and intends to appear in person or by proxy at the
meeting to nominate the person or persons specified in the
recommendation; (c) a description of all arrangements or
understandings between the Stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to
which the nomination or nominations are to be made by the
Stockholder; (d) such other information regarding each nominee
proposed by such Stockholder as would be required to be included in
a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission, had the nominee been nominated,
or intended to be nominated, by the Board of Directors; and (e) the
consent of each nominee to serve as a Director of the Company if so
elected. The Nominating Committee met once during 1994.
The Board of Directors met thirteen times during 1994 and all of
the Directors, other than Messrs. Denning and Henson, attended at
least 75% of the aggregate of all meetings of the Board and all
Committees of which they were members during 1994.
Stock ownership of directors and officers: The following table
sets forth as of February 14, 1995 beneficial ownership of Common
Stock by each Director, each of the executive officers named in the
Summary Compensation Table below, and by all Directors and all
executive officers as a group.
Amount and Nature
Name Of Beneficial Shares Subject Percentage
Of Beneficial Owner Ownership (1) To Option (2) Of Class (3)
Steven A. Denning 1,523,024 (4) -0- 7.9%
Roy L. Faulks 5,666 5,166 *
Joe M. Henson -0- (5) -0- *
Frederick B. Karl 4,667 4,167 *
Dr. John M. Palms 1,666 1,666 *
Joseph D. Sargent 4,167 4,167 *
John P. Seibels 15,166 10,000 *
Richard G. Trub 4,367 4,167 *
G. Larry Wilson 249,821 (6) 208,333 1.3%
David T. Bailey 80,017 (7) 79,166 *
Donald A. Coggiola 119,515 (8) 114,166 *
Robert L. Gresham 86,305 (9) 79,166 *
Stephen G. Morrison 14,302 (10) 14,287 *
Directors and all executive
officers as a group 2,205,538 (11) 620,633 11.4%
(1) Except where noted below, each individual has sole voting and
sole dispositive power.
(2) These shares, which are included in the "Amount and Nature of
Beneficial Ownership" column, are subject to option on or before
May 10, 1995, pursuant to the Company's various stock option plans.
(3) Less than one percent where indicated by asterisk.
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(4) Mr. Denning personally owns 4,000 of these shares and is
deemed to beneficially own 125,571 of these shares by virtue of his
status as a general partner in GAP Coinvestment which beneficially
owns these shares. Mr. Denning is also deemed to own 1,393,453 of
these shares by virtue of his status in the general partner of
General Atlantic which beneficially owns these shares (see
"Principal Stockholders"). Mr. Denning disclaims beneficial
ownership of the shares of Common Stock held by GAP Coinvestment
and General Atlantic, except to the extent of his pecuniary
interest in GAP Coinvestment and General Atlantic.
(5) Although Mr. Henson is not considered the "beneficial owner"
of Common Stock of the Company for purposes of the Securities and
Exchange Commission's rules governing the solicitation of proxies,
he is a limited partner in a limited partnership which has invested
in Common Stock of the Company and in which Mr. Henson has an
indirect interest of approximately 15,000 shares of Common Stock.
Mr. Henson, however, does not have any voting or dispositive power
for any of the shares held by the limited partnership.
(6) 1,488 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.
(7) 185 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.
(8) Mr. Coggiola is deemed to beneficially own 100 of these shares
by virtue of his deceased father's estate owning these shares in
which Mr. Coggiola has an interest. Mr. Coggiola disclaims
beneficial ownership of the 100 shares.
(9) 375 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.
(10) On February 13, 1994, Mr. Morrison filed a Form 5 with the SEC
reporting, among other transactions and holdings, direct ownership
of 15 shares of Common Stock which were inadvertently not reported
on his Form 3 which was filed with the SEC in January 1994.
(11) An aggregate of 2,541 of these shares are held in the
Company's 401(k) Retirement Savings Plan for which the respective
executive officer has sole dispositive power but no voting power
for the shares allocated to his account.
COMPENSATION PLANS AND ARRANGEMENTS
Compensation of Directors: Directors who are not full-time
employees of the Company receive an annual fee of $15,000.00, plus
$2,000.00 for each Board meeting attended and $750.00 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. In
addition, Mr. Trub, Chairman of the Audit Committee, was paid
$200,000 in 1994 for his extensive oversight of the Company's
progress through the restatement of its financial statements and
implementation of certain internal control procedures.
On October 13, 1994, each of the current Directors who was not a
full-time employee of the Company, except Mr. Henson, was granted
options to purchase 15,000 shares of Common Stock under the 1989
Stock Option Plan having an exercise price of $44.00 per share. On
November 4, 1994, the date of his election to the Board, Mr. Henson
was granted options to purchase 15,000 shares of Common Stock under
the 1989 Stock Option Plan having an exercise price of $47.00 per
share. These options are, for all such Directors granted options
on October 13, 1994 in part and for Mr. Henson entirely, subject to
Stockholders' approval of the
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Amendments to the 1989 Stock Option Plan (see "Proxy Item No. 3").
During 1994, none of the Directors exercised options.
Compensation of Executive Officers: The following table sets forth
information regarding compensation earned, including stock options
granted, during 1992, 1993 and 1994 by the Chief Executive Officer
and the four other most highly compensated executive officers of
the Company ("Executive Group").
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 (2) Payouts sation (3)
G. Larry Wilson 1994 $500,776 $138,000 275,000 $ -0- $4,500
President and Chief 1993 496,930 50,000 100,000 -0- 7,284
Executive Officer 1992 456,940 234,000 50,000 1,196,000 6,198
David T. Bailey 1994 282,573 49,632 135,000 -0- 4,500
Executive Vice 1993 280,482 -0- 50,000 -0- 7,075
President 1992 260,540 98,250 25,000 777,400 8,700
Donald A. Coggiola 1994 281,120 49,456 75,000 -0- 648
Executive Vice 1993 279,546 -0- 50,000 -0- 7,075
President 1992 260,540 86,329 25,000 777,400 8,700
Robert L. Gresham 1994 267,020 46,992 15,000 -0- 4,500
Executive Vice 1993 265,326 -0- 50,000 -0- 6,805
President and 1992 243,308 98,000 25,000 777,400 6,198
Treasurer
Stephen G. Morrison 1994 345,146 -0- 96,667 -0- -0-
Executive Vice
President, General
Counsel and
Secretary (4)
(1) Reflects amount earned in year indicated even though actually
paid in following year and for Mr. Wilson includes $50,000 earned
under his Executive Compensation Agreement (see "Executive
Compensation Agreement").
(2) A portion of the options granted during 1994 are subject to
the Stockholders approving the Amendments to the 1989 Stock Option
Plan (see "Proxy Item No. 3").
(3) Amounts shown are matching contributions from the Company
under its 401(k) Retirement Savings Plan.
(4) Mr. Morrison joined the Company during 1994 and for this
reason compensation data for 1992 and 1993 is not included. Under
the terms of Mr. Morrison's employment agreement with the Company,
Mr. Morrison is eligible for an annual bonus of up to 40% of his
base salary. In his employment agreement, the 40% annual bonus for
the first two years of Mr. Morrison's employment is guaranteed and
therefore not contingent. For this reason, the annual bonus earned
in 1994 is contained in the "salary" column.
The following table sets forth certain information regarding
options for Common Stock granted to the Executive Group during
1994. The table includes the potential realizable value
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which would exist based on assumed annual compounded rates of
Common Stock price appreciation of five and ten percent over the
full ten-year term of the options.
OPTIONS GRANTED IN 1994
Individual Grants
Percent Potential Realizable Value at
Number of Total Assumed Annual Rates of
of Securities Options Exercise Stock Price Appreciation
Underlying Granted to Price Expiration for Option Term
Options Employees Per Date Of
Granted in 1994 Share Options 5% 10%
All Stockholders - - - - $430,644,933(1) $1,091,345,157(1)
537,362,416(2) 1,361,789,783(2)
G. Larry Wilson 50,000(3) 20% $30.25 May 12, 2004 951,196 2,410,532
225,000(4) 44.00 October 13, 2004 6,226,011 15,778,026
David T. Bailey 35,000(3) 10% 30.25 May 12, 2004 665,837 1,687,372
100,000(4) 44.00 October 13, 2004 2,767,116 7,012,456
Donald A. Coggiola 25,000(3) 6% 30.25 May 12,2004 475,598 1,205,266
50,000(4) 44.00 October 13, 2004 1,383,558 3,506,228
Robert L. Gresham 15,000(3) 1% 30.25 May 12, 2004 285,359 723,160
Stephen G. Morrison 25,000(5) 7% 30.00 January 10, 2004 471,668 1,195,305
41,667(6) 31.20 January 10, 2004 441,668 1,165,305
30,000(4) 44.00 October 13, 2004 830,135 2,103,737
(1) The potential realizable value for all Stockholders is based
on the number of shares of Common Stock outstanding on May 12, 1994
(the date the options described in note 3 below were granted) and
assumes the Stockholders purchased the Common Stock for $30.25
(which was the fair market value of the Common Stock on May 12,
1994) and held the Common Stock until May 12, 2004. 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.
(2) The potential realizable value of all Stockholders is based on
the number of shares of Common Stock outstanding on October 13,
1994 (the date the options described in note 4 below were granted)
and assumes the Stockholders purchased the Common Stock for $44.00
(which was the fair market value of the Common Stock on October 13,
1994) and held the Common Stock until October 13, 2004. 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.
(3) These options were granted pursuant to the Company's 1989
Stock Option Plan. The exercise price is the fair market value of
the Common Stock on May 12, 1994, which was the date of grant.
These options become exercisable in one-third increments on each of
the first, second and third anniversary dates of the grant date.
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
provision in the Plan.
(4) These options were also granted pursuant to the Company's 1989
Stock Option Plan and
11
the number of options is contingent in part on the Stockholders
approving the Amendments to the 1989 Stock Option Plan. If the
Stockholders approve the Amendments, these options would become
immediately exercisable in the event of a change in control of the
Company (see "Proxy Item No. 3"). The exercise price is the fair
market value of the Common Stock on October 13, 1994, which was the
date of grant. These options become exercisable in one-third
increments on each of the third, fourth and fifth anniversary dates
of the grant date. See note 3 above for a description of other
material terms of this Plan.
(5) These options were granted pursuant to the Company's 1989
Stock Option Plan. The exercise price is the fair market value of
the Common Stock on the date of grant, which was also the date Mr.
Morrison was hired by the Company. These options become
exercisable in one-third increments on each of the first, second
and third anniversary dates of the grant date. See note 3 above
for a description of other material terms of this Plan.
(6) These options were granted pursuant to the Policy Management
Systems Corporation 1993 Long-Term Incentive Plan for Executives
("1993 LTIP"). The exercise price for grants under the Plan in
1994 is 104% of the fair market value of the Common Stock on the
date of grant. These options become exercisable as follows:
January 1, 1995 - 5,954; January 1, 1997 - 11,904; January 1, 1999
- - 23,809. 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.
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
1994 year-end market price of Common Stock. None of the officers
in the Executive Group exercised options during 1994.
AGGREGATED YEAR-END OPTION VALUES
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at December 31, 1994 at December 31, 1994 *
Exercisable Unexercisable Exercisable Unexercisable
G. Larry Wilson 208,333 366,667 $443,500 $587,500
David T. Bailey 79,166 180,834 -0- 411,250
Donald A. Coggiola 114,166 120,834 406,750 293,750
Robert L. Gresham 79,166 60,834 -0- 176,250
Stephen G. Morrison 14,287 52,380 164,299 585,704
<FN>
* Value represents the aggregate excess of the market price of
the Common Stock on December 31, 1994, which was $44.00, over the
exercise price for the options. All options included in the table
have an exercise price equal to or greater than the fair market
value of the Common Stock on the dates of grant.
Executive Compensation Agreement: The Company had an Executive
Compensation Agreement with Mr. Wilson whereby the Company was
obligated to pay, subject primarily to
12
his continued employment, certain specified amounts over a
five-year period. The specified amounts to be paid over a five-
year period consisted of five annual installments of $10,000 each
for a given year's bonus. Thus, a bonus of $50,000 was earned for
a given year but was paid over a five-year period such that after
the fifth year, assuming the Agreement was renewed during each of
the five years, Mr. Wilson would be entitled to a payment of
$50,000, i.e., first $10,000 installment from the prior year, plus
the second $10,000 installment from two years prior plus the third
$10,000 installment from three years prior, etc. This Agreement
was renewable annually at the option of the Company. A payment of
$50,000 was paid in early 1995. As a result of other changes and
increases in the compensation package for Mr. Wilson which were
made in early 1995, the Compensation Committee of the Board of
Directors elected at that time to not renew the Agreement and
therefore no further amounts will be paid or earned under this
Agreement.
Deferred Compensation Agreement: Mr. Wilson is covered by a
Deferred Compensation Agreement providing annual remuneration of
$25,000 upon retirement, death or total disability. The Agreement,
which provides for monthly payments over a fifteen-year period, is
contingent primarily upon his continued employment until such an
event occurs, and the deferred benefits are not vested until that
time. Until or unless such a qualifying event occurs, Mr. Wilson
is not entitled to any payments under the Agreement. The Company
owns life insurance contracts covering Mr. Wilson, of which it is
the beneficiary, in an aggregate amount equal to or in excess of
the total benefit.
Employment Agreements: The Stock Option/Non-Compete Agreements for
the Chief Executive Officer and for the Executive Vice Presidents
who were granted stock options on October 13, 1994 provide that if
there is a change in control of the Company, as that term is
defined in the Agreement, the individual shall be paid an annual
salary, for a period of two years following such change in
control, equal to 100% of his average annual cash compensation,
based on the two years prior to such change in control. However,
the total amount to be paid shall not exceed the amount which would
cause such payment to be deemed a "parachute payment" as defined in
Section 280G of the Internal Revenue Code.
The payments under each of the Stock Option/Non-Compete Agreements
cease in the event of reasonable proof of any violation of the
non-competition or confidentiality provisions of the Agreement or
in the event employment is terminated for cause. Also, if during
a potential change in control or following a change in control an
individual voluntarily terminates employment for other than good
reason, his annual salary is payable for only one year following
such termination of employment.
The Stock Option/Non-Compete Agreements, for the Chief Executive
Officer and for the Executive Vice Presidents who were granted
options on October 13, 1994, also provide that if there is a change
in control of the Company the options granted on October 13, 1994
will become exercisable in one-third increments on the first,
second and third anniversary dates of the date the options were
granted, rather than on the third, fourth and fifth anniversary
dates as is the case in the absence of a change in control,
regardless of whether there is a change in position with the
Company of the executive following the change in control. The
Agreements also provide that if the Stockholders approve the
Amendments to the 1989 Stock Option Plan, then all of the options
granted on October 13, 1994 would become immediately exercisable in
the event of a change in control and the optionee would have,
notwithstanding other provisions of the 1989 Stock Option Plan, the
right to exercise such options for a period of ninety days after
termination of employment. In no event, however, may an optionee
exercise such options after the tenth anniversary date of the date
of grant of such options.
13
The Company has an Employment Agreement with a term through
December 31, 1998 with Mr. Morrison pursuant to which he serves as
the Company's General Counsel, Secretary and Executive Vice
President. There was a transition period during which Mr. Morrison
continued to devote significant time to the practice of law as a
partner with the firm of Nelson, Mullins, Riley & Scarborough as
well as to the Company. During this transition period, Mr.
Morrison's compensation was adjusted to approximate the portion of
time he was devoting to the Company and is reflected in the Summary
Compensation Table. Even after the transition period, Mr. Morrison
will continue his affiliation with Nelson, Mullins, Riley &
Scarborough. The Agreement also states that Mr. Morrison will be
eligible to participate in the annual bonus program, pursuant to
which he may earn up to 40% of his base salary. For the first two
years, however, the bonus is guaranteed for the full 40%. Under
the Agreement, Mr. Morrison is also entitled to receive annually
options to purchase at least 25,000 shares of Common Stock under a
Company-sponsored stock option plan.
The Employment Agreement for Mr. Morrison contains a provision that
if there is a change in control of the Company, he shall be paid,
for the remaining term of his Employment Agreement plus one year,
an annual salary equal to 150% of his average cash compensation for
the two calendar years preceding such change in control. He shall
be paid during the same period, as compensation for his
non-competition agreement, 50% of such average amount. However,
the total amount to be paid shall not exceed the amount which would
cause such payment to be deemed a "parachute payment" as defined in
Section 280G of the Internal Revenue Code.
The payments under Mr. Morrison's Employment Agreement would cease
in the event of reasonable proof of any violation of the
non-competition or confidentiality provisions of the Employment
Agreement or in the event his employment is terminated for cause.
Also, if during a potential change in control or following a change
in control he were to voluntarily terminate employment for other
than good cause, his annual salary is payable for only one year
following such termination of employment. The change in control
provisions in Mr. Morrison's Employment Agreement supersede those
in his Stock Option/Non-Compete Agreement during the term of his
Employment Agreement to the extent there is a conflict.
Board Compensation Committee Report on Executive Compensation:
Decisions on compensation of the Company's executive officers
generally are made by the Compensation Committee of the Board and
reviewed with the full Board. Donald W. Feddersen served as
Chairman of the Committee until October 3, 1994, and resigned from
the Board on October 31, 1994. Messrs. Denning and Henson became
members of the Committee on October 3, 1994 and November 4, 1994,
respectively. Set forth below is a report of the Board's
Compensation Committee addressing the Company's compensation
policies for 1994 for its executive officers. Each Committee member
named below approves the report with respect to the determinations
made by the Committee during the time he was a member of the
Committee.
Compensation Philosophy. The Committee believes that the Company
must pay competitively to attract and retain qualified executives.
To motivate executive personnel to perform at their full potential,
the Committee believes a significant portion of compensation should
be incentive-based. In addition, the Committee believes it is
important to reward not only individual performance and
achievement, but also to focus on overall corporate results. This
latter objective serves the dual purpose of encouraging teamwork
among executives and also supporting the Company's objective of
increasing Stockholder value. The Committee also believes it is
essential that the Committee retain the flexibility to evaluate not
only the overall performances of the individual executive officers
and the Company as a whole, but also all other circumstances and
challenges facing the Company and the respective executive officer.
14
Consequently, the Committee uses its subjectivity rather than
objective formulas in setting and adjusting the base salary of the
executive officers.
Elements of Compensation. Compensation earned during 1994, as
reflected in the foregoing tables, consisted primarily of three
parts: salary, annual bonus and award of stock options. (The
executive officers were also eligible for other benefits such as
perquisites standard for executives and those offered under the
Company-sponsored broad-based plans.) Each of these elements is
described in more detail below.
Base Salaries for Executive Officers. For 1994, the base salaries
for all executive officers, including the Chief Executive
Officer's, were left at the 1993 levels, pending completion of the
restatement of the Company's financial statements (see
"Ratification of the Selection of Independent Auditors" for further
background).
Annual Bonus Program. The 1994 annual bonus program for executive
officers was intended to provide short-term incentives and rewards
based on the Company's short-term goals that were consistent with
its long-term goals, as well as to promote the Company's philosophy
of having a substantial portion of executive compensation "at
risk." It was the Committee's subjective assessment that for the
named executive officers, an amount equal to 40% of base salary was
an appropriate percentage to have at risk on an annual basis.
The annual bonus for executive officers with profit and loss
responsibility reporting to the Chief Executive Officer (a "P&L
Executive Officer") was generally comprised of two parts. One part
was based on the Company's performance, as measured by targeted
earnings-per-share for 1994 and the target established for 1995 for
earnings-per-share. If actual 1994 earnings-per-share were less
than the target or the target for 1995 was reduced, the bonus was
to be reduced for 1994 by a stated percentage. The other part was
based on the performance of the group for which the executive is
responsible, as measured against the business plan established in
the prior year for the executive's group and the target performance
for the group established for 1995. If the actual 1994 performance
was less than the target or if the established target for 1995 was
reduced, the bonus was to be reduced for 1994 by a stated
percentage.
For Mr. Wilson and those executive officers other than P&L
Executive Officers, the annual bonus was to be based on the
Company's performance, as measured by targeted earnings-per-share
for 1994 and the target established for 1995 earnings-per-share.
Messrs. Gresham and Morrison are the only named executive officers
who are not P&L Executive Officers.
The above 1994 annual bonus program was a significant deviation
from the approach taken in prior years and for that reason, the
Committee retained the discretion to use its subjective assessment
to award or withhold bonuses under the plan for any or all of the
executive officers. In early 1995, the Committee reviewed the
level of bonuses which would have been awarded to each executive
officer under the plan described above and decided that, despite
significant contributions by each P&L Executive Officer, they would
have been entitled to an annual bonus under such formula less than
the amount which the Committee believed to be fair and equitable.
Consequently, the Committee exercised its discretion with respect
to the P&L Executive Officers and awarded each a bonus equal to
17.6% of base salary. With respect to Mr. Wilson and the other
executive officers other than the P&L Executive Officers, but
excluding Mr. Morrison, they were awarded a bonus under the formula
in the annual bonus program, which equaled 17.6% of base salary.
Under the terms of his Employment Agreement, Mr. Morrison is
guaranteed an annual bonus of a certain amount for his first two
years of employment (see "Employment Agreements"). The Committee
believed
15
that the amount of the bonuses reflects the executives'
contribution to the Company for 1994 and the Company's performance
for 1994, relative to the Committee's expectations.
Pursuant to his Executive Compensation Agreement (see "Executive
Compensation Agreement"), Mr. Wilson was also paid a bonus of
$50,000 for 1994. As a result of other changes and increases in
the compensation package for Mr. Wilson which were made in early
1995, the Committee elected at that time to not renew the Executive
Compensation Agreement for years beyond 1994.
Stock Option Plans. The 1989 Stock Option Plan was designed for
option grants to key employees, including the executive officers.
The Plan is intended to provide incentives and rewards for a
relatively short-term (3 years) to mid-term (6 years) and to
provide a further means for aligning employees' and Stockholders'
interests in the enhancement of Stockholder value. In May 1994,
the Committee determined that options should be granted to certain
of the executive officers as well as to other key employees. In
addition, in October 1994, the Committee determined that additional
options, having a longer exercisability schedule than that of the
May 1994 grants, should be granted to certain of the executive
officers as well as to other key employees (see "Options Granted in
1994 Table" for the terms of these grants).
In determining the number of options to be granted in 1994,
including the number for the Chief Executive Officer, the Committee
considered the historical pattern of granting options under the
1989 Stock Option Plan as well as competitive levels needed to
retain the respective executive officer. In the Committee's
subjective assessment, the number and exercise price for options
historically granted annually to the executive officers has
provided the appropriate short-term incentive and rewards.
Consequently, for the options granted in May 1994, the Committee
determined that granting, in most cases, approximately the same
number of options as has previously been granted would provide the
appropriate level of near-term incentive and reward for the
executive officers. In addition, the Committee determined that
with respect to the October 1994 grant, increasing the number of
options and lengthening the exercisability schedule provided the
appropriate level of mid-term to long-term incentive and reward for
the executive officers receiving the options. In setting the
number and exercise schedule of options, the Committee considered
the number and terms of exercise of options previously granted to
the executive officers, as well as the competitive levels needed to
retain the respective executive officer.
Compensation Deduction Limitation. In 1993, Section 162(m) was
added to the Internal Revenue Code. This section generally
disallows the corporate tax deduction for certain compensation paid
in excess of $1,000,000 annually to certain executive officers of
publicly-held companies. An exception to the deduction limit is
for "performance-based compensation." The Company believes that
the 1993 LTIP satisfies the requirements for qualifying stock
options as performance-based compensation under the exception. In
addition, the Company believes that the 1989 Stock Option Plan has
also satisfied such requirements under transition rules applicable
to Section 162(m). Upon approval of the Amendments to the 1989
Stock Option Plan and the performance goal components in the 1989
Stock Option Plan, the Company believes that the 1989 Stock Option
Plan will continue to satisfy such requirements (see "Proxy Item
No. 3"). Therefore, the Company expects that any stock option
compensation realized upon the exercise of stock options granted at
a fair market value or higher exercise price under these plans will
not be subject to such compensation deduction limit. For this
reason, and
16
because the Company's annual cash compensation to each of its
executive officers is currently below the $1,000,000 limit, the
Company does not at this time anticipate any loss of deductibility
for 1995 under the new law for compensation paid to its executive
officers.
Compensation Committee
Steven A. Denning, Chairman
Donald W. Feddersen (Chairman
through October 3, 1994)
Joe M. Henson
Frederick B. Karl
Joseph D. Sargent
Compensation Committee Interlocks and Insider Participation:
During 1994, the Compensation Committee of the Board of Directors
of the Company consisted of Messrs. Denning, Henson, Karl, Sargent
and, until his resignation in October 1994, Donald W. Feddersen,
none of whom are or were previously employees or officers of the
Company or any of the Company's subsidiaries. Mr. Sargent is a
director and executive officer of Connecticut Surety Corporation,
which received software licenses and data processing services from
the Company for which it paid the Company approximately $125,000
during 1994. The Company considers such transactions with
Connecticut Surety Corporation to have been on substantially
similar terms as those prevailing at the time for comparable
transactions with unrelated third parties.
Stock Performance: The following graph compares the cumulative
total Stockholder return on the Company's Common Stock during the
five years ended December 31, 1994 with the cumulative total
return on the Standard & Poor 500 Index and the Standard & Poor
Computer Software and Services Index. The comparison assumes $100
was invested on the last trading day of 1989 in the Company's
Common Stock and also in each of the indices and assumes
reinvestment of all dividends which may have been paid. The
performance shown in the graph is not necessarily indicative of
future performance.
STOCK PERFORMANCE
Policy Standard & Computer
Management Poor Software and
Measurement Period Systems 500 Services
(Fiscal Year Covered) Corporation Index Index
Measurement Point - December 31, 1989
December 31, 1989 $100.00 $100.00 $100.00
December 31, 1990 122.06 96.89 78.06
December 31, 1991 194.85 126.42 118.99
December 31, 1992 241.54 136.05 140.92
December 31, 1993 91.18 149.76 179.86
December 31, 1994 123.53 151.74 212.60
17
CERTAIN TRANSACTIONS
On April 26, 1994, International Business Machines Corporation
("IBM") entered into a Stock Purchase Agreement with the Company
pursuant to which IBM agreed to sell to the Company 2,278,537
shares of the Company's Common Stock which IBM purchased in 1989.
The purchase price for the Company's repurchase of this Common
Stock was approximately $56.6 million. On the same date, IBM
entered into a Stock Purchase Agreement with the General Atlantic
Investors pursuant to which IBM agreed to sell to the General
Atlantic Investors the remaining 1,519,024 shares of Common Stock
owned by IBM for a purchase price of approximately $37.6 million.
IBM's sale to the Company closed on May 16, 1994. IBM's sale to
the General Atlantic Investors closed on June 20, 1994 and upon
such closing the General Atlantic Investors owned approximately
7.5% of the Company's Common Stock outstanding at that time.
The General Atlantic Investors and the Company entered into a
Shareholders' Agreement ("Shareholders' Agreement") and a
Registration Rights Agreement ("Registration Rights Agreement" ),
each dated April 26, 1994. Pursuant to the Shareholders'
Agreement, the General Atlantic Investors are entitled to cause the
Nominating Committee of the Company's Board of Directors to
recommend a nominee to the Company's Board of Directors. The
General Atlantic Investors' initial designee was Mr. Denning. The
Shareholders' Agreement imposes restrictions on the ability of the
General Atlantic Investors and certain of their affiliates to
increase their ownership interest in the Company beyond 14.99% (or,
in certain circumstances, 19.99%), to dispose of shares of Common
Stock except pursuant to a right of first offer in favor of the
Company or in other specified circumstances, and to influence the
management and affairs of the Company. Pursuant to the
Registration Rights Agreement, the General Atlantic Investors and
certain of their affiliates are entitled to certain registration
rights with respect to the Common Stock owned by them including the
right to demand that the Company register such Common Stock under
the Securities Act of 1933, as amended, and the right to
participate in certain registrations initiated by the Company.
During calendar year 1994, the Company and its subsidiaries paid to
IBM and its subsidiaries approximately $9.2 million for computer
hardware, programs and services and received approximately $14.6
million from IBM and its subsidiaries for computer software and
services. In addition, during 1994, Connecticut Surety
Corporation, of which Mr. Sargent is a director and an executive
officer, received software licenses and data processing services
from the Company for which it paid the Company approximately
$125,000 during 1994. The Company considers such transactions 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.
RATIFICATION OF THE SELECTION OF INDEPENDENT AUDITORS
(Proxy Item No. 2): Stockholders will vote on the ratification of
the selection by the Board of Directors of Coopers & Lybrand as
independent auditors to audit the books, records and accounts of
the Company and its subsidiaries for the year ending December 31,
1995. At the 1994 annual meeting of Stockholders of the Company
held on October 13, 1994, the Stockholders ratified the selection
of Coopers & Lybrand as independent auditors for the years ending
December 31, 1992 through 1994. Coopers & Lybrand was retained in
August 1993 by the Company to conduct a special audit of the
Company's financial statements for the six-month period ended June
30, 1993 and to audit the Company's financial statements as of and
for the fiscal years ended December 31, 1992 and December 31, 1993.
The restated financial statements for the year ended December 31,
1992 and the financial
18
statements for the year ended December 31, 1993 have been
completed. The report of Coopers & Lybrand is unqualified but does
include Emphasis Paragraphs discussing errors in previously-issued
financial statements and certain legal matters and is contained in
the 1993 Annual Report previously provided to Stockholders. A
representative from Coopers & Lybrand is expected to be present at
the Meeting and will have the opportunity to make a statement and
will be available to answer questions.
The circumstances relating to the withdrawal by the Company's
previous independent auditors of their respective audit report for
the years ended December 31, 1990, 1991 and 1992 are as follows.
By letter dated August 10, 1993, Arthur Andersen & Co. ("Arthur
Andersen") informed the Company of its withdrawal of its auditors'
report on the Company's financial statements for the year ended
December 31, 1992 due to significant uncertainty related to the
outcome of the internal investigation then being conducted by the
Company concerning certain of the Company's business and accounting
practices and the effect of those practices on the financial
statements. Arthur Andersen indicated that the outcome of the
internal investigation was likely to require a restatement of the
Company's 1992 financial statements. At a meeting on August 10,
1993, in connection with the withdrawal of its auditors' report,
Arthur Andersen advised the Board of Directors of the Company that
subsequent to the issuance of Arthur Andersen's report and after
the first quarter of 1993, certain information had come to its
attention relating to the following matters. Arthur Andersen
advised the Board that it believed that there were material
weaknesses in the internal controls of the Company, that
information had come to its attention that led it to question
certain of the Company's business practices and whether it would
have been able any longer to rely on management's representations
and that information had come to its attention that, if further
investigated, might have materially impacted the fairness and
reliability of the Company's financial statements for prior
periods. In its comments to the Board of Directors, Arthur
Andersen raised questions regarding the Company's accounting
practices related to revenue recognition and certain other matters
which had not been resolved at the time of its termination. The
Company, through its representatives, has discussed each of these
matters with Arthur Andersen.
By letter dated August 13, 1993, Ernst & Young, the independent
auditors of the Company prior to Arthur Andersen, informed the
Company that its February 20, 1992 auditors' report should no
longer be associated with the Company's financial statements for
the years ended December 31, 1991 and 1990 after the Company
confirmed to Ernst & Young on August 13, 1993 that the outcome of
an internal investigation then being conducted by the Company and
its legal counsel into certain of the Company's business and
accounting practices was likely to result in revision of its
financial statements for periods prior to 1992. Ernst & Young took
its actions because of the significant uncertainty which thus
existed as to the effect on the Company's 1991 and 1990 financial
statements. By letter dated August 16, 1993, Ernst & Young further
advised the Company that its review reports on interim financial
statements during the years ended December 31, 1992, 1991 and 1990
should no longer be associated with those financial statements.
The Company and certain of its officers and directors have been
named as defendants in a lawsuit alleging violation of the federal
securities laws and purporting to be a class action. Among the
allegations are that the Company's financial statements for the
year ended December 31, 1992 are materially false and misleading.
(In December 1994, the Company reached an agreement in principle,
subject to court approval, to settle this lawsuit.) Because Arthur
Andersen audited those financial statements, the Company believed
that there existed the potential for conflicts between the Company
and Arthur Andersen. As a result, the Company concluded that a
change in its outside auditors was appropriate. On August 17,
1993, the Board of Directors, acting on the Audit Committee's
recommendation, engaged the
19
firm of Coopers & Lybrand as its independent accountants to audit
the Company's financial statements for the six months ended June
30, 1993, including a review of the Company's internal control
structure, replacing Arthur Andersen. The Company authorized
Arthur Andersen to respond fully to inquiries of Coopers & Lybrand
concerning these matters, based upon information that had come to
Arthur Andersen in its capacity as principal accountant to audit
the Company's financial statements.
Neither the previously issued auditors' report of Arthur Andersen
on the Company's financial statements for the year ended December
31, 1992 nor the previously issued auditors' report of Ernst &
Young on the Company's financial statements for the year ended
December 31, 1991 contained any adverse opinion or disclaimer, nor
was either report qualified as to uncertainty, audit scope, or
accounting principles.
There have been no disagreements within the meaning of Item 304(a)
of Regulation S-K between the Company and either Arthur Andersen or
Ernst & Young in connection with the audits for the fiscal years
ended December 31, 1992 and 1991, respectively, or subsequently, on
any matter of accounting principles or practices, financial
statements disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of such former
principal accountants, would have caused either firm to make
reference to the subject matter of the disagreements in connection
with its report.
The Company has furnished each of Arthur Andersen and Ernst & Young
a copy of this disclosure regarding independent auditors and
requested that they each furnish a letter addressed to the
Securities and Exchange Commission stating whether it agrees with
the statements made herein.
The Board of Directors recommends that the Stockholders vote FOR
the ratification of the selection of Coopers & Lybrand as
independent auditors for the Company.
APPROVAL OF THE AMENDMENT TO THE 1989 STOCK OPTION PLAN
(Proxy Item No. 3): Stockholders will vote on the approval of the
Amendments to the 1989 Stock Option Plan to: provide for an
additional 2,250,000 shares of Common Stock available for issuance
under the Plan; permit options granted under the Plan to be
immediately exercisable in the event of a change in control of the
Company; and to authorize the Board of Directors of the Company, in
its sole discretion, to allow optionees who resign or retire from
the Company, to exercise outstanding options earlier than would
otherwise be permitted by the exercisability schedule contained in
the Plan. In addition, the Company seeks approval of the
performance goal components of the Plan to satisfy the requirements
of Section 162(m) of the Internal Revenue Code.
The Board of Directors believes that the Amendments are in the best
interest of the Company because they will provide a further means
for aligning employees' and Stockholders' interests in the
enhancement of Stockholder value and for attracting and retaining
qualified key employees. In addition, the Board of Directors
believes satisfying the requirements of Section 162(m) of the
Internal Revenue Code is in the best interest of the Company
because it will allow the Company to provide the incentives and
rewards necessary to attract and retain qualified executives
without losing the deductibility of such performance based
compensation. Approval of the Amendments and of the performance
goal components requires the approval of a majority of the shares
represented at the Meeting and are more fully described below.
Disregarding options to purchase 815,146 shares which were granted
in October 1994 and subject in part to Stockholders' approval of
the Amendments to the 1989 Stock Option
20
Plan, as of December 31, 1994 only 788,422 of the 2,500,000 shares
reserved remained available for issuance under the Plan. The Plan
is designed for the benefit of full-time, salaried employees or
directors of the Company or a subsidiary of the Company who, in the
judgment of the Compensation Committee of the Board, are key to the
success of the Company or such subsidiary and who are not ten
percent shareholders (collectively, " Key Employees"). The Company
estimates that approximately 150 to 200 employees are presently
eligible to receive option grants under the Plan. The 1989 Stock
Option Plan contains a provision that the maximum number of options
which may be granted under the Plan during any calendar year to any
individual shall not exceed 500,000. Of the options granted during
1994 under the Plan, options to purchase 555,000 shares were
granted to the executive officers named in the "Options Granted in
1994 Table" at the exercise prices listed in that Table, options to
purchase 767,000 shares were granted to all current executive
officers as a group, options to purchase 120,000 shares were
granted to all current Directors who are not executive officers as
a group, and options to purchase 373,796 shares were granted to all
other eligible Key Employees, including all current officers who
are not executive officers as a group. Options granted to
individuals other than the executive officers named in the "Options
Granted in 1994 Table" and the Directors have exercise prices equal
to the fair market value on the dates of grant, which were: $34.25
for options granted on February 1, 1994; $30.25 for options granted
on May 12, 1994; $33.00 for options granted on July 19, 1994; and
$44.00 for options granted on October 13, 1994.
The Compensation Committee designates the optionees, the date of
grant, the number of option shares, the terms of exercise and the
time period in which the options may be exercised. The Plan does
not, however, currently permit the Compensation Committee to grant
options which may be exercised earlier than in one-third increments
on each of the first, second and third anniversary dates of the
date of grant.
The Plan permits options granted to be either qualified Incentive
Stock Options pursuant to the Internal Revenue Code or
non-qualified stock options, as the Compensation Committee may
elect. Upon exercise of a non-qualified option, the optionee will
realize ordinary income in an amount equal to the excess of the
fair market value of the shares of Common Stock received over the
exercise price of such shares. That amount increases the
optionee's basis in the stock acquired pursuant to the exercise of
the non-qualified option. Upon a subsequent sale of the stock, the
optionee will generally recognize additional capital gain. The
Company generally will be allowed a federal income tax deduction
for the amount recognized as ordinary income by the optionee upon
the exercise of the option.
The option price of the Common Stock may not be less than 100% of
the fair market value of the Common Stock on the date of grant. At
March 31, 1995, the fair market value of the stock was $43.86 per
share. Options may be exercised only by payment in full of the
option price. Options are non-transferable, except by will or
according to state laws of descent and distribution in the event of
death. The options shall expire no later than ten years after the
date granted or earlier upon the occurrence of certain specified
events.
The Amendments to the 1989 Stock Option Plan also provide the
Compensation Committee discretion to include in the terms and
conditions of such option grants that if there is a change in
control of the Company, as defined in the Amendments, 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 participants. In the event of such a change in
control, the optionee would be permitted for a period of ninety
(90) days after termination of employment to exercise the options.
In no event, however, would an optionee be permitted to exercise
options after the tenth anniversary date of the grant of such
options. The Plan cur-
21
rently states that 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 optionee is permitted to exercise his options
to the extent they are exercisable, without regard to any
installment exercise provisions in the Plan. The Company believes
that the Amendments, when added to the 1989 Stock Option Plan,
would improve the Company's position in attracting and retaining
qualified Key Employees since such provisions would treat optionees
more fairly by: allowing optionees to participate in the change-
in-control transaction similar to other Stockholders; providing the
optionees reassurance and enhance retention during a potential
change in control; and providing a right similar to that offered by
many other computer software and services companies.
The Amendments to the 1989 Stock Option Plan also would authorize
the Board of Directors to accelerate the exercisability of options
if an optionee retired or resigned from the Company. The Company
believes that this flexibility is a way for the Board to provide
additional incentives to retire or resign to individuals who were
previously Key Employees and therefore granted options but who are
no longer contributing to the success of the Company in the way
they did at the time they were granted the options.
Section 162(m) of the Internal Revenue Code generally requires
public companies to receive shareholder approval of the performance
goal components of plans like the 1989 Stock Option Plan in which
its top executives participate and which may result in or
contribute to the top executives receiving compensation in excess
of $1.0 million in any year, in order for such companies to deduct
compensation in excess of $1.0 million. Included within the
compensation to be counted towards the $1.0 million would be gains
realized by the executives on the exercise of nonqualified stock
options. Although the Board of Directors does not believe that
compensation levels of the Company's executive officers will reach
the Section 162(m) deductibility limits in 1995, the Board does
believe that it is important for the Company to take all reasonable
steps to ensure that the Company will be able to take all available
tax deductions with respect to compensation resulting from the
exercises of stock options in the future.
The performance goal components of the 1989 Stock Option Plan for
purposes of Section 162(m) of the Internal Revenue Code are: (i)
the individuals eligible to receive options under the Plan are Key
Employees; (ii) the maximum number of options which may be granted
during any calendar year to any employee is 500,000; and (iii) the
fact that under the terms of the Plan, the exercise price of
options granted may not be less than the fair market value of the
Common Stock on the date of grant and, therefore, the amount of
compensation an optionee can receive under the Plan is based solely
on an increase in the value of the Common Stock after the date of
the grant of the option.
The Board of Directors recommends that the Stockholders vote FOR
the approval of the Amendments to the 1989 Stock Option Plan and of
the performance goal components within the Plan.
APPROVAL OF THE POLICY MANAGEMENT SYSTEMS CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
(Proxy Item No. 4): Stockholders will vote on the approval of the
Stock Purchase Plan. The Board of Directors believes it is in the
best interest of the Company to adopt the Stock Purchase Plan. By
simplifying and providing an additional financial incentive for the
purchase of shares of the Common Stock of the Company by its
employees, the Company will obtain the benefit of the added
incentive inherent in the ownership of Common Stock by
22
such employees. The Stock Purchase Plan requires the approval of
a majority of the shares represented at the Meeting and is more
fully described below.
Under the Stock Purchase Plan, eligible employees of the Company
and certain of its affiliates are given the opportunity to
purchase, through installment payments to be deducted from their
salary, shares of Common Stock. Generally, all full-time employees
of the Company and certain of its affiliates who have been employed
by the Company or the respective affiliate for one year are
eligible to participate in the Stock Purchase Plan and elect to do
so by authorizing the Company to deduct specified amounts from
their paychecks. Each participant may elect to have between $10.00
and the lesser of $900.00 per payroll period or 10% of base salary
deducted from his or her biweekly paycheck to be used to purchase
Common Stock of the Company. The Company or the respective
affiliate adds a matching contribution of 15% of each participant's
contributions for the purchase of Common Stock. In addition, the
Company pays brokerage fees and related administrative expenses
associated with the purchases of the Common Stock.
Except for participating executive officers of the Company, a
participant may increase, decrease or suspend altogether his
purchases under the Stock Purchase Plan at any time by notifying
the Company. A participant may request and receive a distribution
under the Plan, in cash or stock, at any time. Participants
receiving a distribution of stock, or cash in lieu thereof, within
two years of the date of purchase, shall be ineligible to
participate in the Plan for a period of one year. With respect to
the executive officers of the Company, the Stock Purchase Plan sets
forth certain restrictions, consistent with applicable Securities
and Exchange Commission rules and regulations, regarding such
changes in participation.
After every payroll period, the Company forwards the aggregate
amount deducted from the participants' paychecks together with the
15% matching contribution to the plan administrator who then
purchases Common Stock of the Company in open market transactions,
in accordance with guidelines issued by the Securities and Exchange
Commission. (The plan administrator is not, and under the terms of
the Stock Purchase Plan cannot be, an affiliate of the Company.)
Upon completion of the purchases, the plan administrator allocates
on a monthly basis to each participant's account the number of
shares, whole and partial, purchased based on the average purchase
price per share. The Company has the right to amend or terminate
the Plan at any time.
Participants realize taxable fringe benefit income at the time the
15% matching contribution is made. Because the Plan is not a tax-
qualified plan and the participants make their contributions on an
after-tax basis, there is no special tax treatment for the
participants' contributions. Participants will be taxed on the
gains if and when they realize them from the subsequent sale of the
Common Stock purchased under the Plan. The Company will be
entitled to deduct as an expense the amount of the 15% matching
contribution and its costs incurred in administering the Plan.
The Board of Directors recommends that the Stockholders vote FOR
the approval of the Stock Purchase Plan.
OTHER PROPOSALS
There is no reason to believe that any other business will be
presented at the Meeting; however, if any other business should
properly and lawfully come before the Meeting, the persons named in
the proxy will vote in accordance with their best judgment.
23
For a Stockholder proposal to be presented at the next annual
meeting, it must be received by the Company not later than November
21, 1995, in order to be included in the Proxy Statement and proxy
for the 1996 annual meeting. Any such proposal should be addressed
to the Company's Secretary and mailed to Post Office Box Ten,
Columbia, South Carolina 29202.
Stephen G. Morrison
Secretary