1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1997 Commission file number 1-10557
POLICY MANAGEMENT SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
South Carolina 57-0723125
(State or other jurisdiction
(I.R.S. Employer
of incorporation) Identification No.)
One PMSC Center (P.O. Box Ten)
Blythewood, S.C. (Columbia, S.C.) 29016 (29202)
(Address of principal executive (Zip Code)
offices)
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 X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
18,179,401 Common shares, $.01 par value, as of May 15,1997
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, 1996.
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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,
1997 and 1996..................................... 3
Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996.............. 4
Consolidated Statements of Cash Flows for
the three months ended March 31, 1997 and 1996.... 5
Notes to Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................ 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................17
Item 6. Exhibits and Reports on Form 8-K....................17
Signatures....................................................18
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PART I
FINANCIAL INFORMATION
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months
Ended March 31,
1997 1996
(Unaudited)
(In Thousands, Except Per Share Data)
Revenues
Licensing................................ $ 26,218 $ 24,295
Services................................. 129,038 108,888
155,256 133,183
Operating expenses
Cost of revenues
Employee compensation & benefits......... 51,297 41,925
Computer and communications
expenses............................... 8,515 7,975
Information services and
data acquisition costs................. 30,514 28,037
Depreciation and amortization of
property, equipment and
capitalized software costs............. 14,059 11,134
Other costs & expenses................... 8,283 6,561
Selling, general and administrative
expenses................................ 23,253 17,058
Amortization of goodwill and
other intangibles....................... 2,682 2,543
Litigation settlement and
expenses, net.......................... - (63)
Business acquisition charges.............. 71 (73)
138,674 115,097
Operating income .......................... 16,582 18,086
Minority interest income................... 369 -
Other Income and Expenses
Investment income........................ 427 596
Interest expense and other
charges................................ (1,217) (711)
( 790) (115)
Income before income taxes................. 16,161 17,971
Income taxes............................... 6,069 6,343
Net income................................. $ 10,092 $ 11,628
Net income per share....................... $ .56 $ .60
Weighted average number of shares.......... 18,179 19,463
<FN>
See accompanying notes
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POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
March 31, December 31,
1997 1996
(In Thousands,
Assets Except Share Data)
Current assets
Cash and equivalents................................... $ 9,993 $ 22,121
Marketable securities.................................. 2,492 2,234
Receivables, net of allowance for uncollectible
amounts of $1,402 ($883 at 1996).................... 119,996 116,113
Income tax receivable.................................. 1,355 1,383
Deferred income taxes.................................. 16,222 15,343
Other.................................................. 17,651 15,840
Total current assets................................ 167,709 173,034
Property and equipment, at cost less accumulated
depreciation and amortization of $127,879
($122,462 at 1996).................................. 116,188 115,757
Receivables.............................................. 4,374 4,866
Income tax receivable.................................... 4,041 4,041
Goodwill and other intangibles assets, net............... 78,999 83,363
Capitalized software costs, net.......................... 183,161 177,875
Deferred income taxes.................................... 2,146 1,560
Investments.............................................. 6,125 6,483
Other.................................................... 4,557 5,239
Total assets..................................... $567,300 $572,218
Liabilities
Current liabilities
Accounts payable and accrued expenses.................. $ 50,586 $ 61,435
Accrued restructuring charges.......................... 2,081 2,478
Accrued contract termination costs..................... 825 407
Current portion of long-term debt...................... 29,991 31,222
Income taxes payable................................... 10,240 6,623
Unearned revenues...................................... 12,322 9,840
Other.................................................. 413 631
Total current liabilities........................... 106,458 112,636
Long-term debt........................................... 27,281 34,268
Deferred income taxes.................................... 60,159 58,370
Accrued restructuring charges............................ 568 1,340
Other.................................................... 2,209 2,352
Total liabilities................................... 196,675 208,966
Commitments and contingencies (Note 1)
Stockholders' Equity
Special stock, $.01 par value, 5,000,000 shares
authorized............................................ - -
Common stock, $.01 par value, 75,000,000 shares
authorized, 18,179,401 shares issued and
outstanding (18,179,186 at December 31, 1996)......... 182 182
Additional paid-in capital............................... 106,111 106,104
Retained earnings........................................ 266,202 256,110
Foreign currency translation adjustment.................. (1,870) 856
Total stockholders' equity.......................... 370,625 363,252
Total liabilities and stockholders' equity....... $567,300 $572,218
<FN>
See accompanying notes
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POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
1997 1996
Operating Activities (In Thousands)
Net income...................................... $ 10,092 $ 11,628
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................. 17,530 14,376
Deferred income taxes......................... 320 7,226
Provision for uncollectible accounts.......... ( 742) 65
Impairment and restructuring charges.......... 444 -
Changes in assets and liabilities:
Accrued restructuring and lease
termination costs........................... ( 1,170) ( 3,823)
Receivables................................... ( 2,649) 4,188
Income taxes receivable....................... 27 ( 241)
Accounts payable and accrued expenses......... (10,849) (18,231)
Income taxes payable.......................... 3,618 3,475
Other, net...................................... 1,163 ( 2,669)
Cash provided by operations................ 17,784 15,994
Investing Activities
Proceeds from sales/maturities of marketable
securities..................................... 250 1,000
Acquisition of property and equipment........... ( 7,717) ( 4,208)
Capitalized internal software development
costs.......................................... (14,368) (13,276)
Purchased software.............................. - ( 1,040)
Earnings from minority interest................. ( 154) -
Proceeds from disposal of property and
equipment...................................... 130 409
Cash (used) by investing
activities............................... (21,859) (17,115)
Financing Activities
Payments on long-term debt...................... (23,456) (16,939)
Proceeds from borrowing under credit facility... 15,238 -
Issuance of common stock under stock
option plans................................... 7 2,260
Cash (used) by financing
activities............................... ( 8,211) (14,679)
Effect of exchange rate changes on cash........... 158 180
Net (decrease)increase in cash and
equivalents..................................... (12,128) (15,620)
Cash and equivalents at beginning of period....... 22,121 35,094
Cash and equivalents at end of period............. $ 9,993 $ 19,474
Supplemental Information
Interest paid................................... $ 1,182 $ 497
Income taxes paid(refunded)..................... 1,305 ( 4,325)
<FN>
See accompanying notes
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POLICY MANAGEMENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
NOTE 1. CONTINGENCIES
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 this investigation.
In March 1994, Security Life of Denver Insurance Company ("SLD") brought suit
against the Company in the United States District Court for the District of
Colorado alleging breach of a life insurance joint development contract, unfair
trade practices, and fraud. SLD sought direct, indirect, consequential, and
punitive damages in excess of $80 million. In February 1997 following a jury
trial, the Court and jury entered judgments in favor of the Company against SLD
on the claims of fraud and unfair trade practices. A verdict and judgment was
returned against the Company for breach of contract and damages of $3.5 million,
together with pre-judgment interest. In addition the jury found that SLD was
using the Company's trade secrets without permission. As a result of post trial
motions, the judgment was amended to delete the award of pre-judgment interest
and SLD was ordered to return the Company's systems. Both the Company and SLD
have appealed to the United States Court of Appeals. Changes in the status of
this proceeding could result in a change in subsequent periods in the Company's
estimate of anticipated liability for the estimated costs associated with these
matters.
The Company is also presently involved in litigation which commenced in
January of 1996 in the Circuit Court in Greenville County, South Carolina with
Liberty Life Insurance Company and certain of its affiliates ("Liberty") arising
out of the parties' prior contractual relationship related to the development
and licensing of Series III life insurance systems and the subsequent licensing
of the Company's Cybertek life insurance systems. Liberty's complaint alleges
breach of contract, breach of express and implied warranties, fraudulent
inducement, breach of contract accompanied by a fraudulent act, and recission.
Liberty has alleged actual and consequential damages of approximately $30
million and also seeks treble and punitive damages. The Company has asserted
various affirmative defenses and is pursuing counterclaims against Liberty for
breach of contract, recoupment, breach of good faith and fair dealing, and
breach of contract accompanied by a fraudulent act. The Company is seeking
equitable relief, including injunctive relief, and currently unspecified
actual, compensatory and consequential damages.
Based upon the allegations raised in a prior lawsuit and the SLD lawsuit, the
Company's insurer, St. Paul Mercury Insurance Company ("St. Paul"),in June 1995
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commenced a declaratory judgment action in the United States District Court for
the District of South Carolina against the Company to determine St. Paul's
obligation for defense costs and to indemnify the Company for any payment
related to these claims. The Company filed a counterclaim against St. Paul
seeking to recover the Company's defense costs in both matters, coverage for
damages, if any, awarded in those matters, and consequential and punitive
damages.
In connection with the dismissal of the prior lawsuit, St. Paul and the
Company agreed to dismiss with prejudice all claims against each other with
respect to the matter, and St. Paul agreed to reimburse the Company for the
Company's legal fees. The action continues as to the parties claims related to
insurance coverage for the SLD matter.
In addition to the litigation described above, there are also various other
litigation proceedings and claims arising in the ordinary course of business.
The Company believes it has meritorious defenses and is vigorously defending
these matters.
The Company is currently involved in a contract dispute with a customer over
the terms and billings rates contained therein. The Company believes that the
dispute will be resolved without any significant financial impact, however at
the present time the maximum financial exposure is $1.5 million.
While the resolution of any of the above matters could have a material adverse
effect on the results of operations in future periods, the Company does not
expect these matters to have a material adverse effect on its consolidated
financial position. The Company, however, is unable to predict the ultimate
outcome or the potential financial impact of these matters.
NOTE 2. NEW ACCOUNTING STANDARDS
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("FAS 128"), was issued. FAS 128 is designed to improve the
earnings per share information provided in financial statements by simplifying
the existing computational guidelines, revising the disclosure requirements, and
increasing the comparability of earnings per share data on an international
basis. FAS 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods, earlier application is not
permitted. The Company will adopt FAS 128 on its effective date. Proforma
earnings per share of the Company computed using FAS 128 is not different from
earnings per share computed using existing standards and guidelines.
NOTE 3. RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to current year
presentation.
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POLICY MANAGEMENT SYSTEMS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the consolidated financial statements and
notes thereto contained in Part I of this report on Form 10-Q and with the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
RESULTS OF OPERATIONS
Set forth below are certain operating items expressed as a percentage of
revenues and the percent increase (decrease) for those items between the
periods presented:
Percent
Percentage Increase
of Revenues (Decrease)
Three Months Three Months
Ended March 31, Ended March 31,
Revenues 1997 1996 1997 VS 1996
Licensing...................... 16.9% 18.2% 7.9%
Services....................... 83.1 81.8 18.5
100.0 100.0 16.6
Operating expenses
Cost of revenues
Employee compensation
and benefits................. 33.0 31.5 22.3
Computer & communication
expenses..................... 5.5 6.0 6.8
Information services & data
acquisition costs............ 19.6 21.0 8.8
Depreciation & amortization
of property, equipment &
capitalized software costs... 9.1 8.4 26.3
Other costs & expenses........ 5.3 5.0 26.2
Selling, general &
administrative expenses...... 15.0 12.8 36.3
Amortization of goodwill and
other intangibles............ 1.7 1.9 5.5
Litigation settlement and
expenses, net................ - (.1) -
Business acquisition charges... .1 (.1) -
89.3 86.4 20.5
Operating income................ 10.7 13.6 ( 8.3)
Minority interest income........ .2 -
Other income and expenses....... (.5) (.1) -
Income before income taxes...... 10.4 13.5 (10.1)
Income taxes.................... 3.9 4.8 ( 4.3)
Net income...................... 6.5% 8.7% (13.2)%
9
THREE MONTHS COMPARISON
Comparisons of revenues, operating income and margins for each business
unit for the periods presented are as follows:
Three Months
Ended March 31,
Revenues 1997 1996 Change
(Dollars in Millions)
Enterprise Software and Services
Property & Casualty............. $ 56.5 $ 47.3 19.5%
Life............................ 23.3 15.8 47.2
Information Services
Property & Casualty............. 23.4 22.6 3.6
Life............................ 13.2 13.0 1.8
Total U.S.revenues............. 116.4 98.7 18.0
International ................... 38.8 34.5 12.6
Total revenues $155.2 $133.2
Operating income
Enterprise Software and Services
Property & Casualty............. $ 16.2 $ 15.1 7.3%
Life............................ 4.2 2.3 79.5
Information Services
Property & Casualty............. .1 .2 (39.1)
Life............................ .6 .5 20.7
Corporate........................ (6.1) (5.6) 9.1
Total U.S.operating income..... 15.0 12.5 19.6
International ................... 1.6 5.6 (71.4)
Total operating income $ 16.6 $ 18.1
Operating income as percentage of revenue
Enterprise Software and Services
Property & Casualty............. 28.7% 31.9%
Life............................ 18.0 14.7
Information Services
Property & Casualty............. .6 1.1
Life............................ 4.7 4.0
Total U.S...................... 12.9 12.7
International ................... 4.1 16.2
Total 10.7% 13.6%
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Revenues
Three Three
Months Ended Months Ended
Licensing March 31,1997 March 31,1996 Change
(Dollars in Millions)
Initial charges................ $ 11.3 $ 10.4 8.6 %
Monthly charges................ 14.9 13.9 7.2
$ 26.2 $ 24.3 7.8 %
Percentage of revenues......... 16.9% 18.2%
Initial license revenues increased $.9 million from the first quarter of 1996
to the first quarter of 1997.
Domestic life insurance initial licensing revenues increased 234.2% ($2.8
million) from first quarter 1996 to first quarter 1997. International initial
licensing revenues increased slightly by 1.7%. This was offset by lower
domestic property and casualty licensing revenues, as initial licensing
revenues declined by $2.0 million from the first quarter of 1996 to the first
quarter of 1997. Property and casualty licensing revenues in the United States
are being impacted by various market factors including by many insurance
companies focusing on their year 2000 projects and the need for certain "open"
systems architectures in the Company's property and casualty products. The
Company has initiatives underway to address these issues including a Windows
release of Series III, and new releases of Insure 90, Point and Capsil and
programs to assist prospective customers with near-term year 2000 solutions.
Initial license charges for the first quarter of 1997 include right-to-use
charges (licenses excluding further MESA obligations) of $1.2 million compared
to $1.1 million for the same period of 1996. Initial license charges for the
first quarter of 1997 also include termination charges (related to the buyout of
monthly license charges) of $.2 million.
Monthly license charges increased $1.0 million from the first quarter of 1996
to the first quarter of 1997.
Domestic life insurance monthly license charges increased 44.2% ($.9 million)
and international monthly license charges increased 27.6% ($.7 million). This
increase is principally related to an increase in licensing activities due to
the acquisition of Co-Cam in August 1996. These increases were offset by a
decrease in domestic property and casualty insurance monthly license charges of
4.9% ($.5 million).
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Because a significant portion of initial licensing revenues are recorded at
the time new systems are licensed, there can be significant fluctuations in
revenue from quarter to quarter. Set forth below is a comparison of initial
license revenues for the current and preceding seven quarters expressed as a
percentage of total revenues for each of the periods presented:
1997 1996 1995
1st 4th 3rd 2nd 1st 4th 3rd 2nd*
(Dollars in Millions)
Initial license revenues $11.3 $19.4 $10.1 $12.0 $10.4 $16.1 $11.3 $9.5
Total revenues 7.3% 11.8% 6.9% 8.8% 7.8% 11.6% 8.6% 7.1%
<FN>
*Excludes licensing activity of the Company's Health Insurance Systems business,
sold June 30, 1995. Second quarter 1995 licensing revenues (initial and
monthly licensing charges) related to the Health business were $.3 million.
Three Three
Months Ended Months Ended
Services March 31,1997 March 31,1996 Change
(Dollars In Millions)
Professional and outsourcing... $ 87.3 $ 69.5 25.6 %
Information.................... 40.2 38.8 3.6
Other.......................... 1.5 .6 166.7
$129.0 $108.9 18.5 %
Percentage of revenues......... 83.1% 81.8%
Domestic property and casualty professional and outsourcing services revenues
increased 33.1% ($10.8 million) due to increases in implementation services and
increases in processing volumes in the outsourcing areas related to new and
existing customers. International property and casualty professional and
outsourcing services revenues increased 13.5% ($3.6 million), principally due to
services activity of Co-Cam, acquired August 1996 and increases in the volume of
services provided to new and existing customers.
The domestic life insurance professional and outsourcing services increased
33.0% ($3.4 million) from the first quarter 1996 to the 1997 first quarter, due
principally to increased volumes of implementation services to new and existing
domestic customers.
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Information services revenues increased $1.1 million from the 1996 first
quarter to the 1997 first quarter. This increase is due to an increase of
$.2 million in life insurance information services principally comprised of
attending physician statements and application processing services. Also
contributing to this increase is an increase in property and casualty
information services revenues of $.8 million which consists principally of fees
for domestic motor vehicle reports.
OPERATING EXPENSES
Cost of Revenues
Employee compensation and benefits increased 22.3% for the first quarter 1997
compared with the first quarter of 1996, principally the result of increased
salaries and related costs associated with the acquisition of Co-Cam in August
1996, and increased costs associated with the growth in staffing for additional
professional and outsourcing services. Compensation and benefits increased 61%
($5.9 million) internationally, while domestic increased 11.7% ($4.3 million).
Computer and communications expenses increased 6.8%($.5 million) principally as
a result of increased communications, data circuit and maintenance costs
associated with the growth of the Company's domestic and international
outsourcing operations.
Information services and data acquisition costs increased 8.8%, due
principally to increases of $1.8 million in property and casualty information
costs arising from increased volume of motor vehicle reports and $.7 million in
life insurance information services, arising from increased volume of attending
physician statements.
Depreciation and amortization of property, equipment and capitalized software
costs increased 26.3%. This increase is principally due to higher amortization
expense resulting from the March 1996 release of the latest version of
CyberLife client/server life insurance software and the October 1996 release of
the Company's property and casualty insurance Series III (Release 8)
client/server software systems. In addition depreciation expense increased
principally due to Company's increased investment in its information technology
equipment.
Other operating costs and expenses increased 26.2%. Fees related to the use of
consultants and independent contractors increased, principally the result of
training costs in new technologies and the satisfaction of staffing needs for
certain development and services activities. These increases were offset by an
increase in amounts capitalized principally related to the continued
enhancement and development of the Company's Series III property and casualty
insurance software, CyberLife life insurance software and Insure Plus
international property and casualty software solution, and decreased costs
associated with the depopulation of certain assigned risk polls serviced by the
Company's total policy management business.
Selling, general and administrative expenses
Selling, general and administrative expenses increased 36.3% for the first
quarter 1997 compared with the first quarter of 1996, principally because of the
Company's investment in its international sales force and infrastructure
mainly as a result of the August 1996 acquisition of Co-Cam. However when
compared to the fourth quarter of 1996 the increase was only 2.0%.
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Amortization of goodwill and other intangibles
The 5.5% increase in amortization of goodwill and other intangibles is
principally the result of amortization of intangible assets related to the
acquisition of Co-Cam in August 1996.
OPERATING INCOME
First quarter 1997 operating income decreased 8.3% ($1.5 million) compared
with the 1996 first quarter. This decline is largely the result of increased
expenses in the international operations. International operating income
decreased $4.0 million with revenues increasing by 12.6% and expenses increasing
by 28.8% for the first quarter 1997 when compared to the same period in 1996.
The decline has been caused by the current period increase in expenditures in
the Company's international infrastructure, including its sales force,
professional services organization and product development areas. The decline in
the operating income in the international operations was offset in part by an
increase in both domestic life and property and casualty insurance business
operating income. Domestic life insurance operating income increased 79.5% and
property and casualty insurance business increased 7.3%.
OTHER INCOME AND EXPENSE
As a result of a higher average level of borrowed funds, principally
borrowings under the Company's credit facilities, interest expense increased
$.5 million. The average nominal interest rate applicable to borrowings under
these facilities during the first quarter was 5.9%.
INCOME TAXES
The effective income tax rate (income taxes expressed as a percentage of
pre-tax income) was 37.6% and 35.3% for the three months ended March 31, 1997
and 1996, respectively. The effective rate for the first quarter of 1997 is
higher than the federal statutory rate principally due to the effect of state
and local income taxes.
14
LIQUIDITY AND CAPITAL RESOURCES
March 31, December 31,
1997 1996
Cash and equivalents, marketable (Dollars in Millions)
securities, and investments.................... $ 18.6 $ 30.8
Current assets................................... 167.7 173.0
Current liabilities.............................. 106.4 112.6
Working capital.................................. 61.3 60.4
Long-term debt................................... 27.3 34.3
Three months ended
March 31, March 31,
1997 1996
(Dollars in Millions)
Cash provided by operations...................... $ 17.8 $ 16.0
Cash used for investing activities............... (21.9) (17.1)
Cash used for financing activities............... (8.2) (14.7)
The Company's current ratio (current assets divided by current liabilities)
stood at 1.6 at March 31, 1997, which management believes is sufficient when
combined with the available credit facilities to provide for day-to-day
operating needs and the flexibility to take advantage of investment
opportunities. The Company has available under its credit facilities (net of
amounts outstanding at March 31, 1997) $77.0 million under its 364 day $100.0
million facility and $75.0 million under its 3 year $100.0 million facility,
should management choose debt financing for any of the Company's operating,
investing or financing activities. Also, the Company has available an
uncommitted $10.0 million operating line of credit with which it may
choose to fund temporary operating cash needs.
Cash provided by operations increased $1.8 million from March 31, 1996 to
March 31, 1997. This increase was principally due to a smaller year over year
reduction in accounts payable resulting from payments of amounts accrued during
the quarter in the normal course of business.
During the three months ended March 31, 1997 the Company capitalized software
development costs of $14.4 million principally related to the development of its
Series III client/server property and casualty software (including the
incorporation of object-oriented technology and support for Microsoft Windows),
CyberLife object-oriented client/server life insurance software, an Insure Plus
international property and casualty solution as well as other ongoing projects
for other domestic as well as international products.
Significant expenditures anticipated for the remainder of 1997, excluding any
possible business acquisitions or common share repurchases, are as follows:
acquisition of data processing, communications equipment and office furniture,
fixtures and equipment ($23.1 million); and costs relating to the internal
development of software systems ($43.2 million).
15
The Company has historically used the cash generated from operations for the
following: development and acquisition of new products, acquisition of
businesses and repurchase of the Company's stock. The Company anticipates that
it will continue to use its cash for all of these purposes in the future and
that projected cash from operations, cash and investment reserves along with
amounts available under the Company's debt facilities will be sufficient to meet
presently anticipated operating needs and to accomplish specific objectives in
these areas and for other general corporate purposes.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's operating results and financial condition can be impacted by a
number of factors, including, but not limited to, the following, any of which
could cause actual results to vary materially from current and historical
results or the Company's anticipated future results:
- - Currently, the Company's business is focused principally within the global
property and casualty and life insurance industries;
- - There is increasing competition for the Company's products and services;
- - The market for the Company's products and services is characterized by rapid
changes in technology;
- - Contracts with governmental agencies involve a variety of special risks,
including the risk of early contract termination by the governmental
agency and changes associated with newly elected state administrations or
newly appointed regulators;
- - The timing and amount of the Company's revenues are subject to a number of
factors, including, but not limited to, the timing of customers' decisions
to enter into large license agreements with the Company;
- - Unforeseen events or adverse economic or business trends may significantly
increase cash demands beyond those currently anticipated or affect the
Company's ability to generate/raise cash to satisfy financing needs;
- - The Company's operations have not proven to be significantly seasonal,
although quarterly revenues and net income could be expected to vary at
times;
- - Although the Company cannot accurately determine the amounts attributable
thereto, the Company has been affected by inflation through increased
costs of employee compensation and other operating expenses.
- - Many of the Company's current and potential customers are or will spend
significant amounts of money to make their existing information systems
capable of handling the year 2000.
16
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Changes in the status of certain matters or facts or circumstances
underlying these estimates could result in material changes in these estimates,
and actual results could differ from these estimates.
Because of the foregoing factors, as well as other factors affecting the
Company's operating results, past financial performance should not be considered
to be a reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995:Statements in this report that are not descriptions of historical facts may
be forward-looking statements that are subject to risks and uncertainties,
including economic, competitive and technological factors affecting the
Company's operations, markets, products, services and prices, as well as other
specific factors discussed in the Company's fillings with the Securities and
Exchange Commission. These and other factors may cause actual results to differ
materially from those anticipated.
17
PART II
OTHER INFORMATION
POLICY MANAGEMENT SYSTEMS CORPORATION
Item 1. Legal Proceedings
See Note 1, Contingencies, of Notes to the Consolidated Financial Statements,
which is incorporated by reference in this Item.
Items 2, 3, 4, and 5 are not applicable
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
Exhibits required to be filed with this Quarterly Report on Form 10-Q are
listed in the following Exhibit Index.
Reports on Form 8-K
On February 7, 1997 the Company filed a report on Form 8-K to report the
results of the verdict that was rendered in the Security Life of Denver lawsuit.
18
POLICY MANAGEMENT SYSTEMS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POLICY MANAGEMENT SYSTEMS CORPORATION
(Registrant)
Date: May 15, 1997 By: Timothy V. Williams
Executive Vice President
(Chief Financial Officer)
19
POLICY MANAGEMENT SYSTEMS CORPORATION
EXHIBIT INDEX
Exhibit
Number
3. ARTICLES OF INCORPORATION AND BY-LAWS
A. Bylaws of the Company, as amended through July 19, 1994 incorporating
all amendments thereto subsequent to December 31, 1993 (filed as an
Exhibit to Form 10-K for the year ended December 31, 1994, and is
incorporated herein by reference)
B. Articles of Incorporation of the Company, as amended through October
13, 1994, incorporating all amendments thereto subsequent to December 31,
1993 (filed as an Exhibit to Form 10-K for the year ended December 31,
1994, and is incorporated herein by reference)
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES
A. Specimen forms of certificates for Common Stock of the Company (filed
as an Exhibit to Registration Statement No. 2-74821, dated December 16,
1981, and is incorporated herein by reference)
B. Articles of Incorporation of the Company, as amended through October
13, 1994, incorporating all amendments thereto subsequent to December 31,
1993 (filed as an Exhibit to Form 10-K for the year ended December 31,
1994, and is incorporated herein by reference)
10. MATERIAL CONTRACTS
A. Policy Management Systems Corporation 1986 Stock Option Plan (filed as
an Exhibit to Form 10-K for the year ended December 31, 1986, and is
incorporated herein by reference)
B. Conformed copy of Development and Marketing Agreement between
International Business Machines Corporation and Policy Management
Systems Corporation, dated July 26, 1989 (File No. 0-10175 - filed under
cover of Form SE filed on September 29, 1989, and is incorporated
herein by reference)
C. Policy Management Systems Corporation 1989 Stock Option Plan (File No.
0-10175 - filed under cover of Form SE on March 22, 1991, and is
incorporated herein by reference)
D. Deferred Compensation Agreement with G. Larry Wilson (filed as an
Exhibit to Form 10-K for the year ended December 31, 1993, and is
incorporated herein by reference)
20
E. Executive Compensation Agreement with G. Larry Wilson (filed as an
Exhibit to Form 10-K for the year ended December 31, 1993, and is
incorporated herein by reference)
F. Employment Agreement with Stephen G. Morrison (filed as an Exhibit to
Form 10-Q for the quarter ended March 31, 1994, and is incorporated
herein by reference)
G. Stock Option/Non-Compete Agreement with Stephen G. Morrison (filed as
an Exhibit to Form 10-Q for the quarter ended March 31, 1994, and is
incorporated herein by reference)
H. Shareholders' Agreement, dated April 26, 1994, among Policy Management
Systems Corporation, General Atlantic Partners 14, L.P. and GAP
Coinvestment Partners (filed as an Exhibit to Form 10-Q for the quarter
ended September 30, 1994, and is incorporated herein by reference)
I. Registration Rights Agreement, dated April 26, 1994 among Policy
Management Systems Corporation, General Atlantic Partners 14, L.P. and
GAP Coinvestment Partners (filed as an Exhibit to Form 10-Q for the
quarter ended September 30, 1994, and is incorporated herein by
reference)
J. Employment Agreement with Timothy V. Williams (filed as an Exhibit to
Form 10-K for the year ended December 31, 1994, and is incorporated
herein by reference)
K. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-Q for the quarter ended
September 30, 1992, and is incorporated herein by reference)
L. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-Q for the quarter ended
September 30, 1994, and is incorporated herein by reference)
M. Stock Option (Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-K for the year ended December 31,
1994, and is incorporated herein by reference)
N. Policy Management Systems Corporation 1993 Long-Term Incentive Plan for
Executives (filed as an Exhibit to Form 10-K for the year ended December
31, 1994, and is incorporated herein by reference)
O. First Amendment to the Policy Management Systems Corporation 1989 Stock
Option Plan (filed as an Exhibit to Form 10-K for the year ended December
31, 1994, and is incorporated herein by reference)
P. Fourth Amendment to the Policy Management Systems Corporation 1989
Stock Option Plan (filed as an Exhibit to Form 10-Q for the quarter
ending March 31, 1995, and is incorporated herein by reference)
21
Q. Second and Third Amendments to the Policy Management Systems
Corporation 1989 Stock Option Plan (filed as an Exhibits and to Form
10-Q for the quarter ended June 30, 1995, and is incorporated herein by
reference)
R. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-Q for the quarter ended June
30, 1995, and is incorporated herein by reference)
S. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-K for year ended December 31,
1995, and is incorporated herein by reference)
T. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-K for year ended December 31,
1995, and is incorporated herein by reference)
U. Stock Option/Non-Compete Agreement Amendment No. 1 dated November 8,
1995 to Stock Option/Non-Compete Agreement dated July 20, 1995 with
Paul R. Butare (filed as an Exhibit to Form 10-K for year ended
December 31, 1995, and is incorporated herein by reference)
V. Stock Option/Non-Compete Agreement with Timothy V. Williams dated
February 1, 1994 (filed as an Exhibit to Form 10-K for year ended
December 31, 1995, and is incorporated herein by reference)
W. Stock Option/Non-Compete Agreement with Timothy V. Williams dated May
10, 1995 (filed as an Exhibit to Form 10-K for year ended December 31,
1995, and is incorporated herein by reference)
X. Registration Rights Agreement, dated March 8, 1996, between Policy
Management Systems Corporation and Continental Casualty Company
(filed as an Exhibit to Form 10-Q for the quarter ended March 31, 1996,
and is incorporated herein by reference)
Y. Shareholders Agreement dated March 8, 1996 between Policy Management
Systems Corporation and Continental Casualty Company (filed as an
Exhibit to Form 10-Q for the quarter ended March 31, 1996, and is
incorporated herein by reference)
Z. Stock Option/Non-Compete Form Agreement for named executive officers
together with schedule identifying particulars for each named executive
officer (filed as an Exhibit to Form 10-Q for the quarter ended June 30,
1996, and is incorporated herein by reference)
AA. 364-Day Credit Agreement dated as of August 11, 1995 among Policy
Management Systems Corporation, the Guarantors Party thereto, the Banks
Listed therein and Morgan Guaranty Trust Company of New York as Agent
(filed as an Exhibit to Form for the quarter ended June 30, 1996, and
is incorporated herein by reference)
BB. Three-Year Credit Agreement dated as of August 11, 1995 among Policy
Management Systems Corporation, the Guarantors Party thereto, the
Banks Listed therein and Morgan Guaranty Trust Company of New York as
Agent (filed as an Exhibit to Form 10-Q for
22
the quarter ended June 30, 1996, and is incorporated herein by
reference)
CC. Amendment No. 1 to 364-Day Credit Agreement dated September 29, 1995
among
Policy Management Systems Corporation and Morgan Guaranty Trust
Company of New
York (filed as an Exhibit to Form 10-Q for the quarter ended June 30,
1996, and is
incorporated herein by reference)
DD. Amendment No. 1 to Three-Year Credit Agreement dated September 29,
1995 among
Policy Management Systems Corporation and Morgan Guaranty Trust
Company of
New York (filed as an Exhibit to Form 10-Q for the quarter ended June
30, 1996, and
is incorporated herein by reference)
EE. Amendment No. 2 to 364-Day Credit Agreement dated March 29, 1996 among
Policy
Management Systems Corporation and Morgan Guaranty Trust Company of
New York
(filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1996,
and is
incorporated herein by reference)
FF. Amendment No. 2 to Three-Year Credit Agreement dated March 29, 1996
among Policy
Management Systems Corporation and Morgan Guaranty Trust Company of
New York
(filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1996,
and is
incorporated herein by reference)
GG. Amendment No. 3 to 364-Day Credit Agreement dated August 9, 1996 among
Policy
Management Systems Corporation and Morgan Guaranty Trust Company of
New York
(filed as an Exhibit to Form 10-Q for the quarter ended September 30,
1996, and is
incorporated herein by reference)
HH. Amendment No. 3 to Three-Year Credit Agreement dated August 9, 1996
among Policy
Management Systems Corporation and Morgan Guaranty Trust Company of
New York
(filed as an Exhibit to Form 10-K for year ended December 31, 1996,
and is
incorporated herein by reference)
II. Employment Agreement Form dated November 7, 1996 for Messrs. Butare,
Morrison
and Williams together with a schedule identifying particulars for each
executive officer
(filed as an Exhibit to Form 10-K for year ended December 31, 1996,
and is
incorporated herein by reference)
JJ. Stock Option/Non-Compete Agreement with Stephen G. Morrison dated
October 22,
1996 (filed as an Exhibit to Form 10-K for year ended December 31,
1996, and is
incorporated herein by reference)
KK. Stock Option/Non-Compete Form Agreement dated January 8, 1997 for
named
executive officers together with schedule identifying particulars for
each executive
officer (filed herewith)
LL. Annual Bonus Program for Executive Officers (filed herewith)
23
11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
A. Filed herewith
27. FINANCIAL DATA SCHEDULE
A. Filed herewith