UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
Commission file number 1-10557
POLICY MANAGEMENT SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0723125
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
ONE PMSC CENTER (PO BOX TEN)
BLYTHEWOOD, SC (COLUMBIA, SC) 29016 (29202)
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (803) 333-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
36,070,812 Common shares, $.01 par value, as of November 6, 1998.
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, 1997.
POLICY MANAGEMENT SYSTEMS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 1998 and 1997 3
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997. . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income for the Nine
Months Ended September 30, 1998. . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997. . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . 27
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 27
Signatures . . . . . . . . . . . . . . . . . . . . . . . 28
PART I
FINANCIAL INFORMATION
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(Unaudited)
------------------------------------------
(In thousands, except per share data)
REVENUES
Licensing . . . . . . . . . . . . . . . . . . . $ 31,454 $ 33,316 $ 89,694 $ 91,868
Services. . . . . . . . . . . . . . . . . . . . 119,849 98,639 346,919 278,998
--------- --------- --------- ---------
151,303 131,955 436,613 370,866
--------- --------- --------- ---------
OPERATING EXPENSES
Cost of revenues
Employee compensation and benefits. . . . . . 65,068 55,982 193,157 154,442
Computer and communications expenses. . . . . 9,727 8,140 25,472 24,214
Depreciation and amortization of property,
equipment and capitalized software costs . . 15,642 14,736 47,195 42,961
Other costs and expenses. . . . . . . . . . . 4,717 5,373 17,526 20,368
Selling, general and administrative expenses. . 27,315 24,535 76,294 68,366
Amortization of goodwill and other intangibles. 2,673 2,451 7,585 7,360
Acquisition related charges:
Purchased research and development . . . . . . 2,000 - 2,000 -
Purchased and internally developed software. . 1,732 - 1,732 -
--------- --------- --------- ---------
128,874 111,217 370,961 317,711
--------- --------- --------- ---------
OPERATING INCOME . . . . . . . . . . . . . . . . 22,429 20,738 65,652 53,155
Equity in earnings of unconsolidated affiliates. 129 274 567 964
Minority interest. . . . . . . . . . . . . . . . (44) - (74) -
Other Income and Expenses
Investment income. . . . . . . . . . . . . . . 390 371 1,076 1,142
Interest expense and other charges . . . . . . (993) (1,378) (2,474) (3,951)
--------- --------- --------- ---------
(603) (1,007) (1,398) (2,809)
--------- --------- --------- ---------
Income from continuing operations
before income taxes. . . . . . . . . . . . . . 21,911 20,005 64,747 51,310
Income taxes . . . . . . . . . . . . . . . . . . 8,740 7,454 24,727 19,135
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS. . . . . . . . 13,171 12,551 40,020 32,175
DISCONTINUED OPERATIONS:
Income from operations of discontinued
operations less applicable income taxes
of $344, $252 and $1,164, respectively . . . - 450 389 1,612
Loss on disposal of discontinued operations
less applicable income taxes (benefit) of
$(38), $2,439, and $(38), respectively . . . - (64) (453) (64)
--------- --------- --------- ---------
- 386 (64) 1,548
--------- --------- --------- ---------
NET INCOME . . . . . . . . . . . . . . . . . . . $ 13,171 $ 12,937 $ 39,956 $ 33,723
========= ========= ========= =========
BASIC EARNINGS PER SHARE:
Income from continuing operations. . . . . . . $ 0.36 $ 0.34 $ 1.09 $ 0.89
Income (loss) from discontinued operations . . - 0.01 - 0.04
--------- --------- --------- ---------
$ 0.36 $ 0.35 $ 1.09 $ 0.93
========= ========= ========= =========
DILUTED EARNINGS PER SHARE:
Income from continuing operations. . . . . . . $ 0.33 $ 0.33 $ 1.01 $ 0.86
Income (loss) from discontinued operations . . - 0.01 - 0.04
--------- --------- --------- ---------
$ 0.33 $ 0.34 $ 1.01 $ 0.90
========= ========= ========= =========
Weighted average common shares . . . . . . . . . 36,458 36,460 36,635 36,398
Weighted average common shares assuming dilution 39,549 38,022 39,471 37,297
<FN>
See accompanying notes
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
September 30, December 31,
1998 1997
-------- --------
(In thousands, except share data)
Assets
Current assets
Cash and equivalents. . . . . . . . . . . . . . . . . . . . $ 15,896 $ 32,179
Marketable securities . . . . . . . . . . . . . . . . . . . - 3,280
Receivables, net of allowance for uncollectible
amounts of $2,095 ($2,628 at 1997) . . . . . . . . . . . . 130,622 128,789
Income tax receivable . . . . . . . . . . . . . . . . . . . 1,014 1,098
Deferred income taxes . . . . . . . . . . . . . . . . . . . 9,569 3,628
Other receivable. . . . . . . . . . . . . . . . . . . . . . 11,284 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,710 16,835
--------- ---------
Total current assets. . . . . . . . . . . . . . . . . . . 192,095 185,809
Property and equipment, at cost less accumulated
depreciation and amortization of $121,939
($139,522 at 1997). . . . . . . . . . . . . . . . . . . . . 122,102 116,433
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . 2,188 3,271
Income tax receivable. . . . . . . . . . . . . . . . . . . . 4,041 4,041
Goodwill and other intangibles, net. . . . . . . . . . . . . 81,452 69,125
Capitalized software costs, net. . . . . . . . . . . . . . . 220,476 204,118
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 22,754 21,996
Investments. . . . . . . . . . . . . . . . . . . . . . . . . 9,063 11,066
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,107 2,547
--------- ---------
Total assets. . . . . . . . . . . . . . . . . . . . . . $662,278 $618,406
========= =========
Liabilities
Current liabilities
Accounts payable and accrued expenses . . . . . . . . . . . $ 46,542 $ 57,345
Accrued restructuring charges . . . . . . . . . . . . . . . 187 145
Accrued contract termination costs. . . . . . . . . . . . . 418 830
Current portion of long-term debt . . . . . . . . . . . . . 1,086 1,191
Income taxes payable. . . . . . . . . . . . . . . . . . . . 16,674 7,499
Unearned revenues . . . . . . . . . . . . . . . . . . . . . 12,207 18,806
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 315 397
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . 77,429 86,213
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . 77,000 37,714
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 92,612 80,496
Accrued restructuring charges. . . . . . . . . . . . . . . . 1,409 1,366
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,992 2,121
--------- ---------
Total liabilities. . . . . . . . . . . . . . . . . . . . 252,442 207,910
--------- ---------
Minority interest. . . . . . . . . . . . . . . . . . . . . . 472 -
Commitments and contingencies (Note 3)
Stockholders' Equity
Special stock, $.01 par value, 5,000,000 shares authorized . - -
Common stock, $.01 par value, 75,000,000 shares authorized,
36,125,693 shares issued and outstanding
(18,339,304 at December 31, 1997) . . . . . . . . . . . . . 361 183
Additional paid-in capital . . . . . . . . . . . . . . . . . 71,237 112,090
Retained earnings. . . . . . . . . . . . . . . . . . . . . . 346,139 306,367
Accumulated other comprehensive income . . . . . . . . . . . (8,373) (8,144)
--------- ---------
Total stockholders' equity . . . . . . . . . . . . . . . 409,364 410,496
--------- ---------
Total liabilities and stockholders' equity. . . . . . . $662,278 $618,406
========= =========
<FN>
See accompanying notes
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income(1) Total
----- ------- -------- --------- -------
(Dollars in thousands)
BALANCE, DECEMBER 31, 1997. . . $183 $112,090 $306,367 $(8,144) $410,496
Comprehensive income
Net income . . . . . . . . . . - - 39,956 - 39,956
Other comprehensive income,
net of tax:
Foreign currency
translation adjustments . . - - - (221) (221)
Unrealized loss on
marketable securities . . . - - - (8) (8)
---------
Total comprehensive income 39,727
---------
Stock dividend. . . . . . . . . 184 - (184) - -
Stock options exercised
(709,298 shares). . . . . . . 8 28,793 - - 28,801
Repurchase of 1,349,600 shares
of common stock . . . . . . . (14) (69,646) - - (69,660)
----- --------- --------- -------- ---------
BALANCE, SEPTEMBER 30, 1998 . . $361 $ 71,237 $346,139 $(8,373) $409,364
===== ========= ========= ======== =========
<FN>
See accompanying notes
(1) Comprehensive income for the three months ended September 30, 1998 and 1997
was $14,743 and $11,843, respectively.
Comprehensive income for the nine months ended September 30, 1997 was
$27,935.
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
1998 1997
------ ------
(In thousands)
Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . . $ 39,956 $ 33,723
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . 58,993 53,694
Deferred income taxes . . . . . . . . . . . . . . 1,517 7,059
Provision for uncollectible accounts. . . . . . . 85 1,763
Minority interest . . . . . . . . . . . . . . . . 74 -
Gain on disposal of discontinued operations . . . (1,986) -
Acquisition related charges . . . . . . . . . . . 3,732 -
Impairment charges. . . . . . . . . . . . . . . . - 444
Changes in assets and liabilities:
Accrued restructuring and lease termination costs 85 (2,355)
Receivables . . . . . . . . . . . . . . . . . . . (5,013) (23,380)
Income taxes receivable . . . . . . . . . . . . . 84 (56)
Accounts payable and accrued expenses . . . . . . (14,127) (12,077)
Income taxes payable. . . . . . . . . . . . . . . 9,036 5,854
Other, net. . . . . . . . . . . . . . . . . . . . . (23,630) (943)
--------- ----------
Cash provided by operations. . . . . . . . . . 68,806 63,726
--------- ----------
Investing Activities
Proceeds from sales/maturities of available-for-
sale securities. . . . . . . . . . . . . . . . . . 3,257 250
Proceeds from sales of held-to-
maturity securities. . . . . . . . . . . . . . . . 2,969 -
Proceeds from sale of business segment. . . . . . . 23,826 2,900
Acquisition of property and equipment . . . . . . . (42,204) (22,430)
Capitalized internal software development costs . . (43,599) (46,809)
Business acquisition. . . . . . . . . . . . . . . . (27,143) -
Investment by minority interest . . . . . . . . . . 425 -
Investment in unconsolidated affiliate. . . . . . . (300) -
Proceeds from disposal of property and equipment. . 1,034 1,183
--------- ----------
Cash used by investing activities. . . . . . . (81,735) (64,906)
--------- ----------
Financing Activities
Payments on long-term debt. . . . . . . . . . . . . (42,319) (120,597)
Proceeds from borrowing under credit facility . . . 81,500 113,033
Issuance of common stock under stock
option plans . . . . . . . . . . . . . . . . . . . 28,801 3,933
Repurchase of common stock. . . . . . . . . . . . . (69,660) -
--------- ----------
Cash used by financing activities. . . . . . . (1,678) (3,631)
--------- ----------
Effect of exchange rate changes on cash. . . . . . . (1,676) 1,329
Net decrease in cash and equivalents . . . . . . . . (16,283) (3,482)
Cash and equivalents at beginning of period. . . . . 32,179 22,121
--------- ----------
Cash and equivalents at end of period. . . . . . . . $ 15,896 $ 18,639
========= ==========
Supplemental Information
Interest paid . . . . . . . . . . . . . . . . . . . $ 2,489 $ 3,636
Income taxes paid . . . . . . . . . . . . . . . . . 9,806 5,471
<FN>
Non-cash investing activities:
The Company transferred $11.2 million of property, plant and equipment at
net book value to Lockheed Martin in exchange for an other receivable to be
paid in January 1999.
See accompanying notes
POLICY MANAGEMENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of Policy Management Systems
Corporation (the "Company") have been prepared in accordance with the rules
and regulations of the Securities and Exchange Commission (the "SEC"). These
consolidated financial statements include estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities and the amounts of revenues and expenses.
Actual results could differ from those estimated. In the opinion of
management, these statements include all adjustments necessary for a fair
presentation of the results of all interim periods reported herein. All
adjustments are of a normal recurring nature unless otherwise disclosed.
Certain information and footnote disclosures prepared in accordance with
generally accepted accounting principles have been either condensed or omitted
pursuant to SEC rules and regulations. However, management believes that the
disclosures made are adequate for a fair presentation of results of
operations, financial position and cash flows. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and accompanying notes included in the Company's latest annual
report on Form 10-K.
BASIC AND DILUTED EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") are calculated according to
the provisions of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share". For the Company, the numerator is the same for the
calculation of both basic and diluted EPS. The following is a reconciliation
of the denominator used in the EPS calculations (in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
----- ----- ----- -----
Weighted Average Shares
- -----------------------
Basic EPS. . . . . . . . . . . 36,458 36,460 36,635 36,398
Effect of common stock options 3,091 1,562 2,836 899
------ ------ ------ ------
Diluted EPS. . . . . . . . . . 39,549 38,022 39,471 37,297
====== ====== ====== ======
All options to purchase shares of common stock were included in the
computation of diluted EPS for 1998.
NEW ACCOUNTING STANDARDS
In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") was issued. SFAS 130 establishes standards
for reporting and display of comprehensive income and its components, and is
effective for fiscal years beginning after December 15, 1997. The Company
adopted SFAS 130 at January 1, 1998 and has included the appropriate
disclosures in the Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive Income.
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP
97-2 provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions, and is effective for
transactions entered into in fiscal years beginning after December 31, 1997.
The Company adopted SOP 97-2 at January 1, 1998. The adoption did not have a
material impact on the Company's financial statements.
In February 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance on accounting for the costs of computer software developed
or obtained for internal use, and is effective for fiscal years beginning
after December 31, 1998, with earlier adoption encouraged. The Company
adopted SOP 98-1 at January 1, 1998. The adoption did not have a material
effect on the Company's financial statements.
In June 1998, Statement of Financial Accounting Standard No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133") was issued,
effective for fiscal years beginning after June 15, 1999, with earlier
adoption encouraged. SFAS 133 requires companies to record derivative
instruments on the balance sheet as assets and liabilities, measured at fair
value. Gain or losses resulting from changes in the values of those
derivatives are accounted for depending on the use of the derivative. The
Company does not enter into derivative instruments except occasionally to
hedge the foreign currency exchange and interest rate risk of specific
projected transactions. The Company was not holding any derivative
instruments at December 31, 1997. At September 30, 1998, the Company had a
foreign currency forward contract with a notional amount of 1,000,000 British
pounds and a fair market value of $78,500.
OTHER MATTERS
Certain prior period amounts have been reclassified to conform to current
period presentation.
NOTE 2. ACQUISITIONS
On August 31, 1998, the Company purchased 100% of the outstanding common
stock of The Leverage Group ("TLG") for $25 million in cash. An independent
appraiser estimated the fair market value of the assets acquired and
liabilities assumed including the in-process research and development
("IPR&D"). TLG owns Policy Link , a family of systems designed to support the
administrative tasks associated with administration, commission processing,
payout processing, and disbursement generation for life insurance and annuity
contracts. In addition to continuing to market certain systems, the Company
intends to integrate the family of systems with its existing product,
Cyberlife , to provide a local area network solution that administers products
ranging from traditional whole and term-life insurance to non-traditional,
wealth-accumulation products including annuities and variable annuities. The
Company recorded acquisition charges of approximately $3.7 million related to
the purchase of TLG.
Approximately $2.0 million of these charges represent estimated purchased
IPR&D based on the income approach valuation method. This amount reflects the
fair value of a single subsystem that is not being marketed and will be used
in the Company's research and development activities. Consistent with the
Company's basis of accounting for costs incurred to develop its software this
subsystem is not capitalizable under Statement of Financial Accounting
Standards No. 86 "Accounting for the Costs of Computer Software to Be Sold
Leased or Otherwise Marketed" ("SFAS 86") and has no alternative future use.
The Company will spend approximately $1.0 million through 1999 to complete
integration of this subsystem. The Company believes it will successfully
integrate the family of systems with its existing product.
The remainder of the acquisition charges represents the previously
capitalized historical cost of software purchased and internal in-process
development that is no longer capitalizable based on SFAS 86 as a result of
the acquisition.
NOTE 3. CONTINGENCIES
The Company is 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 in excess of $160 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.
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.
While the resolution of any of the above matters could have a material adverse
effect on the results of operations in future periods, the Company does not
expect these matters to have a material adverse effect on its consolidated
financial position. The Company, however, is unable to predict the ultimate
outcome or the potential financial impact of these matters.
NOTE 4. SEGMENT INFORMATION
The Company's operating segments are the five revenue-producing
components of the Company for which separate financial information is produced
for internal decision making and planning purposes. The segments are as
follows:
1. Property and casualty enterprise software and services (generally referred
to as the "domestic property and casualty business"). This segment provides
software products, product support, professional services and outsourcing
primarily to the US property and casualty insurance market.
2. Life and financial solutions enterprise software and services (generally
referred to as the "domestic life and financial solutions business"). This
segment provides software products, product support, professional services and
outsourcing primarily to the US life insurance and related financial services
markets.
3. International. This segment provides software products, product support,
professional services, outsourcing and information services to the property
and casualty and life insurance markets primarily in Canada, Europe, Asia and
Australia.
4. Property and casualty information services. This segment provided
information services, principally motor vehicle records and claims histories,
to US property and casualty insurers. This segment was sold in August 1997
and is presented as a discontinued operation.
5. Life information services. This segment provided information services,
principally physician reports and medical histories, to US life insurers. This
segment was sold in May 1998 and is presented as a discontinued operation.
Information about the Company's operations for the three and nine months ended
September 30, 1998 and 1997 is as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
------ ------ ------ ------
(In thousands)
REVENUES FROM EXTERNAL CUSTOMERS
Enterprise software and services
Property and casualty . . . . . . . . . . $ 70,343 $ 63,085 $204,912 $174,918
Life and financial solutions. . . . . . . 38,081 26,488 101,842 73,012
--------- --------- --------- ---------
Total US revenues . . . . . . . . . . . 108,424 89,573 306,754 247,930
International . . . . . . . . . . . . . . 42,879 42,382 129,859 122,936
--------- --------- --------- ---------
Total revenues from
continuing operations. . . . . . . . $151,303 $131,955 $436,613 $370,866
========= ========= ========= =========
Discontinued Operations
Information Services
Property and casualty. . . . . . . . . . $ - $ 16,408 $ - $ 64,649
Life . . . . . . . . . . . . . . . . . . - 15,704 11,968 48,608
INCOME (EXPENSE) FROM CONTINUING OPERATIONS
Enterprise software and services
Property and casualty . . . . . . . . . . $ 19,011 $ 17,988 $ 53,445 $ 46,782
Life and financial solutions. . . . . . . 9,558 5,614 24,049 16,823
Corporate and US administrative . . . . . (9,908) (6,915) (23,586) (18,853)
--------- --------- --------- ---------
Total US operating income . . . . . . . 18,661 16,687 53,908 44,752
--------- --------- --------- ---------
International . . . . . . . . . . . . . . 5,819 5,968 17,855 13,505
International administrative. . . . . . . (2,051) (1,917) (6,111) (5,102)
--------- --------- --------- ---------
Total international . . . . . . . . . . 3,768 4,051 11,744 8,403
--------- --------- --------- ---------
Operating income. . . . . . . . . . . 22,429 20,738 65,652 53,155
Equity in earnings of
unconsolidated affiliates . . . . . . . . 129 274 567 964
Minority interest . . . . . . . . . . . . . (44) - (74) -
Other income and expenses . . . . . . . . . (603) (1,007) (1,398) (2,809)
Income taxes. . . . . . . . . . . . . . . . 8,740 7,454 24,727 19,135
--------- --------- --------- ---------
Income from continuing operations . . . . $ 13,171 $ 12,551 $ 40,020 $ 32,175
========= ========= ========= =========
DISCONTINUED OPERATIONS
Information Services
Property and casualty . . . . . . . . . . $ - $ 107 $ (1,018) $ 533
Life. . . . . . . . . . . . . . . . . . . - 585 3,672 2,141
Other income and expenses . . . . . . . . - - (27) -
Income taxes. . . . . . . . . . . . . . . - (306) 2,691 1,126
--------- --------- --------- ---------
Discontinued operations, net . . . . . . $ - $ 386 $ (64) $ 1,548
========= ========= ========= =========
NOTE 5. DISCONTINUED OPERATIONS
The Company sold its life information services segment in May 1998 for
$23.8 million, net of selling expenses, resulting in a pretax gain of $3.0
million and an after-tax gain of $0.1 million. The difference in gain for tax
purposes primarily results from the inability to deduct goodwill related to
the sale for tax purposes. The operations of this segment are presented as
discontinued operations in the accompanying Consolidated Statements of Income.
See Note 4 for income from operations of the discontinued segment.
The Company also recognized an additional loss of $0.6 million, net of tax, on
the sale of its property & casualty information services segment. This loss
is included in discontinued operations in the accompanying Consolidated
Statements of Income.
NOTE 6. STOCK SPLIT
In May 1998, the Company's Board of Directors approved a two-for-one
stock split effected in the form of a stock dividend, whereby each shareholder
of record as of June 1, 1998, received on June 15, 1998, one additional share
of common stock for each share owned as of the record date. As a result of
the split, 18,426,691 shares were issued and $0.2 million was transferred from
Retained Earnings to Common Stock. Weighted average common shares outstanding
and per share amounts for all periods presented have been restated to reflect
the stock split. Share amounts reflected on the Consolidated Balance Sheet
and Consolidated Statements of Changes in Stockholder's Equity and
Comprehensive Income reflect the actual share amounts for each period
presented.
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, 1997.
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:
1998 vs. 1997
Percent
Percentage of Revenues Increase (Decrease)
------------------------- ------------------
Three Nine Three Nine
Months Ended Months Ended Months Months
September 30, September 30, Ended Ended
------------- -------------
1998 1997 1998 1997 September 30
----- ----- ----- ----- -----------------
Revenues
Licensing . . . . . . . . . . . . . 20.8% 25.2% 20.6% 24.8% (5.6)% (2.4)%
Services. . . . . . . . . . . . . . 79.2 74.8 79.4 75.2 21.5 24.3
------ ------ ------ ------
100.0 100.0 100.0 100.0 14.7 17.7
------ ------ ------ ------
Operating expenses
Cost of revenues
Employee compensation and benefits 43.0 42.4 44.2 41.7 16.2 25.1
Computer & communication expenses. 6.4 6.2 5.8 6.5 19.5 5.2
Depreciation & amortization
property, equipment &
capitalized software costs. . . . 10.3 11.2 10.8 11.6 6.1 9.9
Other costs & expenses . . . . . . 3.1 4.1 4.1 5.5 (12.2) (14.0)
Selling, general &
administrative expenses . . . . . 18.1 18.5 17.5 18.4 11.3 11.6
Amortization of goodwill and
other intangibles . . . . . . . . 1.8 1.9 1.7 2.0 9.1 3.1
Acquisition related charges
Purchased research and development. 1.3 - 0.5 - - -
Purchased and internally developed
software. . . . . . . . . . . . . 1.2 - 0.4 - - -
------ ------ ------ ------
85.2 84.3 85.0 85.7 15.9 16.8
------ ------ ------ ------
Operating income . . . . . . . . . . 14.8 15.7 15.0 14.3 8.2 23.5
Equity in earnings of unconsolidated
affiliates. . . . . . . . . . . . 0.1 0.2 0.1 0.3 (52.9) (41.2)
Other income and expenses. . . . . . (0.4) (0.7) (0.3) (0.7) (40.1) (50.2)
------ ------ ------ ------
Income from continuing operations
before income taxes. . . . . . . . 14.5 15.2 14.8 13.9 9.5 26.2
Income taxes . . . . . . . . . . . . 5.8 5.7 5.6 5.2 17.3 29.2
------ ------ ------ ------
Income from continuing operations. . 8.7 9.5 9.2 8.7 4.9 24.4
Discontinued operations, net . . . . - 0.3 - 0.4 (100.0) (104.1)
------ ------ ------ ------
Net income . . . . . . . . . . . . . 8.7% 9.8% 9.2% 9.1% 1.8% 18.5%
====== ====== ====== ======
THREE MONTH COMPARISON
REVENUES
Three Months
Ended September 30,
-------------------
Licensing 1998 1997 Change
----- ----- ------
(Dollars in Millions)
Initial charges. . . . . . . $14.7 $16.9 (13.0)%
Monthly charges. . . . . . . 16.8 16.4 2.0
------ ------
$31.5 $33.3 (5.6)%
====== ======
Percentage of total revenues 20.8% 25.2%
------ ------
In licensing the Company's products, customers generally obligate
themselves to a non-refundable initial license charge and a monthly license
fee payable over a specified period of time, which is usually six years.
The monthly license charge entitles the customer, over the contract period, to
use the licensed product and to receive product support and enhancements.
Initial license revenues decreased $2.2 million for the third quarter of
1998 compared to the third quarter of 1997, with the following increases or
decreases by business segment: property and casualty down 2.0% ($0.1
million); life and financial solutions up 34.6% ($1.5 million); and
international down 48.1% ($3.6 million). Life and financial solutions license
revenue includes $2.3 million of activity by the Company's recent acquisition,
The Leverage Group.
Initial license charges for the third quarter of 1998 include right-to-use
licenses of $2.7 million. This compares to $3.7 million in right-to-use
licenses for the third quarter of 1997. Right to use licenses represent the
acquisition by certain customers of the right to use element of their
remaining monthly license charge obligation, if any, plus the acquisition of a
perpetual right to use the product thereafter. These types of licenses have
been offered to customers by the Company with increasing frequency over the
past three years and are beginning, and will continue, to mitigate the future
monthly license charge growth rate. Initial license charges also include
termination charges (related to the buyout of monthly license charges) of $0.9
million for the third quarter of 1998. There were no termination charges in
the third quarter of 1997.
Monthly license charges increased $0.4 million for the third quarter of
1998 compared to the third quarter of 1997 principally due to strong initial
licensing activity in the fourth quarter of 1997. Increases or decreases by
business segment are as follows: property and casualty unchanged; life and
financial solutions up 18.1% ($0.6 million); and international down 6.3% ($0.2
million).
Because a significant portion of initial licensing revenues are recorded at
the time new systems are licensed and such licensing activity can vary
dramatically from quarter to quarter, there can be significant fluctuations in
revenue from quarter to quarter. Set forth below is a comparison of initial
license revenues for the last eight quarters expressed as a percentage of
total revenues for each of the periods presented:
1998 1997 1996
------------------- ------------------------- ----
3rd 2nd 1st 4th 3rd 2nd 1st 4th
------------------- ------------------------- ----
(Dollars in Millions)
Initial license revenues $14.7 $13.0 $12.6 $25.1 $16.9 $16.6 $11.3 $19.4
% of total revenues 9.7% 9.0% 9.0% 17.0% 12.8% 13.4% 9.8% 15.5%
Three Months
Ended September 30,
-------------------
Services 1998 1997 Change
----- ----- ------
(Dollars In Millions)
Professional and outsourcing $118.6 $97.6 21.5%
Information. . . . . . . . . 0.1 0.1 39.0
Other. . . . . . . . . . . . 1.1 0.9 15.5
------- ------
$119.8 $98.6 21.5%
======= ======
Percentage of total revenues 79.2% 74.8%
------- ------
Professional and outsourcing services revenues increased $21.0 million for the
third quarter of 1998 compared to the third quarter of 1997, with the
following increases by business segment: domestic property and casualty up
14.7% ($7.1 million); life insurance and financial solutions up 49.9% ($9.4
million); and international up 15.0% ($4.5 million). The increases are
principally due to increases in both implementation services and in the
processing volumes of services provided to new and existing customers.
OPERATING EXPENSES
COST OF REVENUES
Employee compensation and benefits increased 16.2% for the third quarter
of 1998 compared to the third quarter of 1997. The net increase results
principally from higher salaries and related costs associated with the growth
in professional services staffing being somewhat offset by the transfer of
certain employee costs to computer and communication expenses as a result of
the Company's data center outsourcing agreement with Lockheed Martin
Corporation ("Lockheed Martin"). Had these employee costs not been
transferred, third quarter 1998 employee compensation and benefits would have
increased 19.7% by comparison to the same period last year. Compensation and
benefits increased 18.7% ($2.9 million) internationally and 15.3% ($6.2
million) domestically.
Computer and communications expenses increased 19.5% for the third quarter of
1998 compared to the third quarter of 1997. At the beginning of the third
quarter, the Company entered into a data center outsourcing agreement with
Lockheed Martin. As a result, certain costs previously included in employee
compensation and benefits are now included in computer and communications
expense. On a comparative basis, the data center outsourcing agreement has
resulted in savings.
Depreciation and amortization of property, equipment and capitalized
software costs increased 6.1% for the third quarter of 1998 compared to the
third quarter of 1997, principally due to higher amortization expense
resulting from the various releases of the Company's internally developed
software products.
Other operating costs and expenses decreased 12.2% for the third quarter
of 1998 compared to the third quarter of 1997, principally due to lower
consultant and contract loss expenses, partially offset by decreased amounts
of capitalized software development costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 11.3% for the
third quarter of 1998 compared to the third quarter of 1997, principally due
to increased commission, bonus, and other salary costs.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles increased 9.1% for the
third quarter of 1998 compared to the third quarter of 1997, principally due
to increased amortization related to the acquisition of The Leverage Group.
OPERATING INCOME
1998 third quarter operating income increased 8.2% compared to 1997 third
quarter operating income. Increases or decreases in segment operating income
were: property and casualty increased 5.7%, life and financial solutions
increased 70.3% and international decreased 2.5%. The increase in operating
income is primarily related to increases in professional services and
outsourcing revenues while operating costs increased at a slower rate than the
related revenue.
OTHER INCOME AND EXPENSE
Interest expense decreased 27.9% for the third quarter of 1998 compared
to the third quarter of 1997, principally due to lower levels of borrowed
funds under the Company's credit facility and capitalization of interest on
construction in progress. The average nominal interest rate applicable to
borrowings under the Company's credit facility during the third quarter of
1998 was 5.9%.
INCOME TAXES
The effective income tax rate (income taxes expressed as a percentage of
pre-tax income) was 39.9% and 37.3% for the third quarters of 1998 and 1997,
respectively. The effective rate for the third quarter of 1998 is higher than
the federal statutory rate principally due to the effect of state and local
income taxes.
DISCONTINUED OPERATIONS
There were no operating results in the third quarter of 1998.
NINE MONTH COMPARISON
REVENUES
Nine Months
Ended September 30,
-------------------
Licensing 1998 1997 Change
----- ----- ------
(Dollars in Millions)
Initial charges. . . . . . . $40.3 $44.8 (10.0)%
Monthly charges. . . . . . . 49.4 47.1 4.8
------ ------
$89.7 $91.9 (2.4)%
====== ======
Percentage of total revenues 20.6% 24.8%
------ ------
Initial license revenues decreased $4.5 million for the first nine months
of 1998 compared to the same period in 1997, with the following increases or
decreases by business segment: property and casualty up 17.5% ($1.9 million);
life and financial solutions down 18.3% ($2.9 million); and international down
19.9% ($3.5 million).
Initial license charges for the first nine months of 1998 include right-to-use
licenses of $9.7 million. This compares to $5.6 million in right-to-use
licenses for the same period of 1997. Initial license charges also include
termination charges (related to the buyout of monthly license charges) of $1.3
million for the first nine months of 1998 compared to $0.2 million for the
first nine months of 1997. Additionally, initial license charges include
license agreements of $2.2 million for the second quarter of 1998 with the
purchaser of the discontinued life information services segment and $1.8
million for the third quarter of 1997 with the purchaser of the discontinued
property & casualty information services segment. Life and financial
solutions license revenue for the third quarter of 1998 includes $2.3 million
of activity by the Company's recent acquisition, The Leverage Group.
Monthly license charges increased $2.3 million for the first nine months of
1998 compared to the same period in 1997 principally due to strong initial
licensing activity in the fourth quarter of 1997. Increases or decreases by
business segment are as follows: property and casualty unchanged; life and
financial solutions up 20.9% ($1.8 million); and international up 4.5% ($0.5
million).
Nine Months
Ended September 30,
-------------------
Services 1998 1997 Change
----- ----- ------
(Dollars In Millions)
Professional and outsourcing $343.4 $274.9 24.9%
Information. . . . . . . . . 0.5 0.5 7.8
Other. . . . . . . . . . . . 3.0 3.6 (17.9)
------- -------
$346.9 $279.0 24.3%
======= =======
Percentage of total revenues 79.4% 75.2%
------- -------
Professional and outsourcing services revenues increased $68.5 million
for the first nine months of 1998 compared to the same period in 1997, with
the following increases by business segment: domestic property and casualty
up 21.5% ($28.8 million); life insurance and financial solutions up 61.5%
($29.8 million); and international up 10.7% ($9.9 million). The increases are
principally due to increases in both implementation services and in the
processing volumes of services provided to new and existing customers.
OPERATING EXPENSES
COST OF REVENUES
Employee compensation and benefits increased 25.1% for the first nine
months of 1998 compared to the same period in 1997. The net increase results
principally from higher salaries and related costs associated with the growth
in professional services staffing being somewhat offset by the transfer of
certain employee costs to computer and communication expenses as a result of
the Company's data center outsourcing agreement with Lockheed Martin. Had
these employee costs not been transferred, the first nine months 1998 employee
compensation and benefits would have increased 26.3% by comparison to the same
period last year. Compensation and benefits increased 21.3% ($9.8 million)
internationally and 26.7% ($28.9 million) domestically.
Computer and communications expenses increased 5.2% for the first nine months
of 1998 compared to the same period in 1997. At the beginning of the third
quarter, the Company entered into a data center outsourcing agreement with
Lockheed Martin. As a result, certain costs previously included in employee
compensation and benefits are now included in computer and communications
expense. On a comparative basis, the data center outsourcing agreement has
resulted in savings.
Depreciation and amortization of property, equipment and capitalized
software costs increased 9.9% for the first nine months of 1998 compared to
the same period in 1997, principally due to higher amortization expense
resulting from the various releases of the Company's internally developed
software products.
Other operating costs and expenses decreased 14.0% for the first nine months
of 1998 compared to the same period in 1997, principally due to lower
consultant, contract loss and bad debt expenses, partially offset by increased
facility costs and decreased amounts of capitalized software development
costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 11.6% for the
first nine months of 1998 compared to the same period in 1997, principally due
to increased bonus, commission, and advertising costs, partially offset by
decreased third party commissions.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles increased 3.1% for the
first nine months of 1998 compared to the same period in 1997, principally due
to increased amortization related to the acquisition of The Leverage Group.
OPERATING INCOME
1998 nine month operating income increased 23.5% compared with 1997 nine
month operating income. Increases in segment operating income were: property
and casualty increased 14.2%, life and financial solutions increased 43.0% and
international increased 32.2%. The increase in operating income is primarily
related to increases in professional services and outsourcing revenues while
operating costs increased at a slower rate than the related revenue.
OTHER INCOME AND EXPENSE
Interest expense decreased 37.4% for the first nine months of 1998
compared to the same period in 1997, principally due to lower levels of
borrowed funds under the Company's credit facility and capitalization of
interest on construction in progress. The average nominal interest rate
applicable to borrowings under the Company's credit facility during the first
nine months of 1998 was 5.9%.
INCOME TAXES
The effective income tax rate (income taxes expressed as a percentage of
pre-tax income) was 38.2% and 37.3% for the nine months ended September 30,
1998 and 1997, respectively. The effective rate for the first nine months of
1998 is higher than the federal statutory rate principally due to the effect
of state and local income taxes.
DISCONTINUED OPERATIONS
Loss from discontinued operations increased for the first nine months of 1998
compared to the same period in 1997, principally due to (i) an additional loss
of $0.6 million recognized during the second quarter of 1998 on the sale
of the property & casualty information services segment; (ii) partial year
operating results in the first nine months of 1998 compared to full year
operating results in the first nine months of 1997 for the life information
services segment; and (iii) no operating results in the first nine months of
1998 compared to eight months operating results in the first nine months of
1997 for the property & casualty information services segment.
STRATEGIC ALLIANCES
Microsoft. In April 1998, the Company announced a new strategic business
alliance with Microsoft Corporation. Under this strategic alliance, the
Company and Microsoft will engage in joint development, sales and marketing
activities geared toward the insurance and related financial services
industries. This alliance is not exclusive.
Lockheed Martin. The Company formed a strategic alliance for systems
outsourcing with Integrated Business Solutions, a unit of Lockheed Martin. In
June 1998, a Data Processing Services Agreement was completed and under its
terms, the Company turned over operation of its Blythewood, South Carolina,
data center to Lockheed Martin on July 1, 1998. As part of the transaction,
the Company transferred to Lockheed Martin substantially all of the data
processing equipment used in the data center operations, at net book value of
approximately $11.3 million, to be paid in January 1999.
LIQUIDITY AND CAPITAL RESOURCES
September 30, December 31,
1998 1997
- ---------------------------------------------------
(Dollars in Millions)
Cash and equivalents, marketable
securities, and investments. . $ 24.9 $ 46.5
Current assets . . . . . . . . . 192.1 185.8
Current liabilities. . . . . . . 77.4 86.2
Working capital. . . . . . . . . 114.7 99.6
Long-term debt . . . . . . . . . 77.0 37.7
Nine Months Ended
September 30,
1998 1997
- ------------------------------------------------------
(Dollars in Millions)
Cash provided by operations. . . . $ 68.8 $ 63.7
Cash used for investing activities (81.7) (64.9)
Cash used for financing activities (1.7) (3.6)
The Company's current ratio (current assets divided by current
liabilities) stood at 2.5 at September 30, 1998, which management believes is
sufficient when combined with the available credit facility to provide for
day-to-day
operating needs and the flexibility to take advantage of investment
opportunities. The Company has available (net of amounts outstanding at
September 30, 1998) $123 million of its $200 million credit facility. The
Company also has available a $15 million uncommitted operating line of credit.
During the nine months ended September 30, 1998 the Company capitalized
software development costs of $43.6 million, principally related to the
development of its S3+ client/server property and casualty software,
CyberLife object-oriented client/server life insurance software, and I+
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 1998, excluding
any possible business acquisitions or common stock repurchases, are as
follows: acquisition of computer and communications equipment, support
software, buildings, building improvements and office furniture, fixtures and
equipment and costs relating to the internal development of software systems.
The Company has historically used the cash generated from operations for
development and acquisition of new products, acquisition of businesses and
repurchase of the Company's stock. The Company anticipates that, subject to
market conditions, it will continue to use its cash for all of these purposes
in the future and that projected cash from operations, along with currently
available borrowing capacity, will be able to meet presently anticipated
needs.
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 and related financial services
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 can 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 spending or
will spend significant amounts of money to make their existing information
systems capable of handling the year 2000.
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.
YEAR 2000
General
- -------
Many existing computer programs were designed to use only two digits to
identify a year in date fields. If not corrected, these applications could
fail or produce erroneous results when working with dates of the Year 2000 and
beyond.
Beginning in the fourth quarter of 1997, the Company initiated
consolidation of its Year 2000 activities under a centralized Year 2000
Project Office. Prior to that, individual business units were responsible for
the assessment, remediation, validation and implementation of Year 2000
corrective actions.
There are seven phases that are included in the Company's Year 2000
project:
Planning - Educating the organization on Year 2000 issues and concerns, the
readiness efforts necessary and preparing for the next phase of the Year 2000
readiness project.
Inventory - Cataloguing all organizational components, including products,
external or internal interfaces, hardware and software that may require
remediation and testing to adequately address Year 2000 concerns.
Triage - Prioritizing and categorizing all products, equipment, interfaces,
data, and facilities identified during the Inventory phase. Emphasis is
placed on the identification of: all mission critical components, those that
are least important, and those that fall in the middle.
Assessment - Identifying areas requiring remediation for every aspect of each
component identified in the Triage phase as mission critical.
Remediation - Repairing, replacing, or retiring components based on the work
identified during the Assessment phase. Unit tests on repaired applications
are also included in this phase.
Testing - Testing components that were repaired. Such tests include both
system tests and integrated tests in test environments with machine dates
advanced to reflect dates in the years 1999 and 2000.
Implementation - Migrating systems, applications, and hardware to production
environments, installation of replacement systems and the retirement of
designated components, as well as finalizing, documenting and taking care of
residual activities. This phase also includes the compilation and retention
of supporting documentation that conforms to prescribed corporate standards.
All phases are currently scheduled to be completed by August 31, 1999.
The Year 2000 issue may potentially affect the Company in four areas: its
product offerings, its service offerings, its internal systems, and its
suppliers and trading partners.
Product Offerings
- ------------------
The Company has updated the code of its primary product offerings to
process dates across the century boundary. Current testing has confirmed the
ability of the applications to process data in both centuries. Beyond that,
continuous testing is scheduled for the first half of 1999 in an environment
simulating a processing date after January 1, 2000 (Year 2000 environment).
This additional testing seeks to confirm that no unanticipated problems will
occur due to third party products with which the Company's applications are
designed to operate. The Company is also in the process of conducting an
inventory and assessment of other Company and third-party products previously
licensed by the Company to customers to determine if they require any
remediation efforts. The Company anticipates completing this inventory and
assessment by December 31, 1998.
Service Offerings
- ------------------
The Company has completed Year 2000 application code remediation for all
domestic property and casualty customers who will be Business Process
Outsourcing ("BPO")/Information Technology Outsourcing ("ITO") customers after
December 31, 1999. Live customer data is currently being processed on these
remediated applications in a production environment. Additional testing is
scheduled for the first half of 1999 in a Year 2000 environment to confirm
that no unanticipated problems will occur due to third party products with
which the Company's applications are designed to operate. The Company has a
limited number of BPO/ITO customers in its Life and Financial Solutions
Enterprise Software and Services and International segments for whom Year 2000
remediation efforts continue. These efforts, including related testing in a
Year 2000 environment, are scheduled to be completed in the second quarter of
1999.
Internal Systems
- -----------------
Internal systems consist primarily of third-party products used by the
Company for its internal operations which include data center hardware and
software, internal financial and human resource systems, and network and PC
hardware and software. The Company's Blythewood data center has completed its
hardware and operating software inventory and has substantially completed the
assessment, remediation, and testing efforts of updating these hardware and
software assets for Year 2000 requirements. As of July 1, 1998, Lockheed
Martin took over the data processing equipment and operational control of the
Blythewood data center and remaining remediation efforts will be coordinated
with it. The Company's Illinois, Australian, and European data centers have
also completed their inventories and are currently in the Assessment phase for
hardware and operating software enhancements required for Year 2000
remediation. Assessment is scheduled for completion by March 31, 1999 with
final implementation scheduled for completion by June 30, 1999.
In 1996, the Company commenced the process of identifying, selecting and
implementing an enterprise wide financial and human resources system to
replace its existing systems. The selected solution is substantially
operational, is designed to meet Year 2000 requirements, and is scheduled to
be fully operational at the end of 1998.
The Company is inventorying and assessing all of its network and PC hardware
and software to determine if any Year 2000 remediation upgrades will be
required. This inventory and assessment phase is scheduled for completion in
the first quarter of 1999 and any required remediation will commence
immediately thereafter. The Company is also assessing its readiness with
respect to non-IT systems which relate primarily to the ordinary maintenance
and operation of its physical facilities, such as elevators, heating and air
conditioning.
Suppliers and Trading Partners
- ---------------------------------
The Company's ability to operate is dependent on relationships with
certain suppliers and trading partners, such as electric utilities and
telephone companies, who provide services to the Company's various offices and
data centers ("mission critical suppliers and trading partners"). The Company
expects to complete the process of identifying all potential mission critical
suppliers and trading partners by December 31, 1998. In the first quarter of
1999, the Company will commence its planned process of evaluating mission
critical supplier and trading partner Year 2000 readiness. Any identified
mission critical third party systems and data interfaces will be tested, to
the extent practical, in a Year 2000 environment. The Company will seek
substantive assurances from its mission critical suppliers and trading
partners as to their Year 2000 readiness where actual testing is impractical
or impossible. The Company's ability to influence cooperation is partially
dependent on the significance of the Company's relationship with its suppliers
and trading partners. The Company anticipates completing this phase of its
Year 2000 readiness project in the second quarter of 1999.
Year 2000 Costs
- -----------------
Since 1995, the Company estimates that it has incurred approximately $6.7
million of costs in addressing Year 2000 remediation issues. Based on the
Company's experience to date, it is not anticipated that the completion of the
remaining Year 2000 remediation efforts will have a material adverse effect
upon the Company's financial position or results of operations. The Company's
past and anticipated future remediation costs are funded by operations.
Year 2000 Risks
- -----------------
The Company's products are designed to be used with and require use of
third-party products, such as operating systems and compilers. Also,
customers often modify the Company's products to suit their unique
requirements. If these third parties experience Year 2000 failures of their
products, or if customers experience system failures as a result of their
modifications or for other reasons, the Company could become involved in
disputes or litigation related to the cause of such system failures.
In addition, the failure to correct material Year 2000 problems could result
in an interruption in, or a failure of, certain normal business activities or
operations and litigation. Such failures could materially and adversely
affect the Company's results of operations, liquidity and financial condition.
Due to the general uncertainty inherent in the Year 2000 problem, resulting in
part from the uncertainty of the Year 2000 readiness of third-party suppliers
and the Company's customers and prospective customers, the Company is unable
to determine at this time whether the consequences of Year 2000 failures will
have a material impact on the Company's results of operations, liquidity or
financial condition. The Year 2000 Project is expected to significantly
reduce the Company's level of uncertainty about the Year 2000 problem and, in
particular, about the Year 2000 compliance and readiness of its mission
critical suppliers and trading partners. The Company believes that, with the
implementation of new business systems and completion of the Project as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
The Company is currently developing contingency plans to minimize the effect
of such disruptions. Such contingency plans are scheduled to be completed by
June 30, 1999.
Readers are cautioned that forward-looking statements contained in this Year
2000 section should be read in conjunction with the Company's disclosures
under the heading "Factors That May Affect Future Results" beginning on page
21.
EURO CONVERSION
On January, 1, 1999, certain member countries of the European Union are
scheduled to establish fixed conversion rates between their existing sovereign
currencies and the euro. The participating countries have agreed to adopt the
euro as their common legal currency on that date. It is also possible that
some of the non-participating countries may also choose to convert to the euro
at a later date. From January 1, 1999, to December 31, 2001, there will be a
transition period, during which the participating countries may conduct
transactions in either their legacy currency or the euro. On January 1, 2002,
new euro-denominated bills and coins will be issued, and by July 1, 2002, all
legacy currency bills and coins will be withdrawn, finalizing the conversion
to the euro.
The Company is currently evaluating methods to address the issues involved
with the introduction of the euro, including the conversion of its products in
the relevant markets and impacts on the processes for preparing taxation and
accounting records.
The Company is surveying licensees of its products domiciled or doing business
in the participating countries. The needs of each licensee may vary with
regards to converting to the euro depending on how and when they choose to
convert. The Company is preparing strategies to modify its products licensed
in the participating countries to convert to the euro. These modifications
will be made available to licensees for a fee. Implementation of the
modifications is the responsibility of each licensee.
Company subsidiaries are incorporated in four of the participating countries:
Germany, Austria, the Netherlands and Ireland. The Company has implemented
new financial accounting systems that will enable it to convert the affected
operations to the euro in a timely and effective manner.
Based upon the Company's experience to date, it is not anticipated that the
euro conversion will have a material impact on the Company's consolidated
financial statements.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: Statements in this report that are not descriptions of historical facts
may be forward-looking statements that are subject to risks and uncertainties,
including economic, competitive and technological factors affecting the
Company's operations, markets, products, services and prices, as well as other
specific factors discussed above and in the Company's filings with the
Securities and Exchange Commission. These and other factors may cause actual
results to differ materially from those anticipated.
PART II
OTHER INFORMATION
POLICY MANAGEMENT SYSTEMS CORPORATION
ITEM 1. LEGAL PROCEEDINGS
See Note 3, Contingencies, of Notes to Consolidated Financial Statements,
which is incorporated by reference in this Item.
ITEMS 2, 3, 4 AND 5 are not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits
Exhibits required to be filed with this Quarterly Report on Form 10-Q are
listed in the following Exhibit Index.
Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 1998.
POLICY MANAGEMENT SYSTEMS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POLICY MANAGEMENT SYSTEMS CORPORATION
-------------------------------------
(Registrant)
Date: November 13, 1998 Timothy V. Williams
Executive Vice President
(Chief Financial Officer)
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)
E. 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)
F. 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)
G. 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)
H. 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)
I. 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)
J. Stock Option/Non-Compete Form Agreement for named executive officers
together with a 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)
K. Stock Option/Non-Compete Form Agreement for named executive officers
together with a 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)
L. Stock Option Non-Compete Form Agreement for named executive officers
together with a 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)
M. 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)
N. 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)
O. 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)
P. Second and Third Amendments to the Policy Management Systems
Corporation 1989 Stock Option Plan (filed as Exhibits to Form 10-Q for the
quarter ended June 30, 1995, and is incorporated herein by reference)
Q. Stock Option/Non-Compete Form Agreement for named executive officers
together with a 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)
R. Stock Option/Non-Compete Form Agreement for named executive officers
together with a 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)
S. Stock Option/Non-Compete Form Agreement for named executive officers
together with a 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 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)
U. 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)
V. 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)
W. 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)
X. 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)
Y. Stock Option/Non-Compete Form Agreement for named executive officers
together with a 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)
Z. 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)
AA. 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)
BB. Stock Option/Non-Compete Form Agreement dated January 8, 1997 for
named executive officers together with a schedule identifying particulars for
each executive officer (filed as an Exhibit to Form 10-Q for the quarter ended
March 31, 1997, and is incorporated herein by reference)
CC. Annual Bonus Program for Executive Officers (filed as an Exhibit to
Form 10-Q for the quarter ended March 31, 1997, and is incorporated herein by
reference)
DD. Form of Amendment No. 1 to the Employment Agreements with Messrs.
Butare, Morrison and Williams, together with a schedule identifying
particulars for each executive officer (filed as an Exhibit to Form 10-Q for
the quarter ended June 30, 1997, and is incorporated herein by reference)
EE. Form of Employment Agreements with Messrs. Wilson, Bailey and Coggiola
together with schedule identifying particulars for each executive officer
(filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1997,
and is incorporated herein by reference)
FF. Credit Agreement dated as of August 8, 1997, among Policy Management
Systems Corporation, the Guarantors Party hereto, Bank of America National
Trust and Savings Association and the Other Financial Institution Party Hereto
(filed as an exhibit to Form 10-Q for the quarter ended September 30, 1997,
and is incorporated herein by reference)
GG. Employment Agreement dated January 1, 1998, and Addendum No. 1 thereto
dated January 26, 1998, with Donald A. Coggiola (filed as an exhibit to Form
10-K for the year ended December 31, 1997 and is incorporated herein by
reference)
HH. Stock Option/Non-Compete Form Agreement for named executive officers
together with a schedule identifying particulars for each named executive
officer (filed as an exhibit to Form 10-Q for the quarter ended March 31, 1998
and is incorporated herein by reference)
II. Policy Management Systems Corporation Restricted Stock Ownership Plan
(filed herewith)
JJ. Form of Restricted Stock Award Agreement dated August 11, 1998 with
Messrs. Berkeley, Feddersen, Palms, Sargent, Seibels and Trub (filed herewith)
27. FINANCIAL DATA SCHEDULES
A. Nine Months Ended September 30, 1998 filed herewith (EDGAR version
only)
B. Nine Months Ended September 30, 1997, as restated, filed herewith
(EDGAR version only)2