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, 1999
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.
35,572,006 Common shares, $.01 par value, as of November 5, 1999.
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, 1998.
POLICY MANAGEMENT SYSTEMS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1999 and 1998 . . . . . 3
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998 . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income for the Nine
Months Ended September 30, 1999 . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . 28
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . 28
Signatures. . . . . . . . . . . . . . . . . . . . . . . 29
PART I
FINANCIAL INFORMATION
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
------ ------ ------ ------
(In thousands, except per share data)
Revenues
Licensing. . . . . . . . . . . . . . . . $ 37,383 $ 31,454 $115,846 $ 89,694
Services . . . . . . . . . . . . . . . . 131,405 119,849 386,763 346,919
---------- --------- --------- ---------
168,788 151,303 502,609 436,613
---------- --------- --------- ---------
Operating expenses
Cost of revenues
Employee compensation and benefits. . . 78,686 65,117 228,796 193,084
Computer and communications expenses. . 12,644 10,892 36,275 26,612
Depreciation and amortization of
property, equipment and
capitalized software costs . . . . . . 108,543 15,647 141,777 46,550
Other costs & expenses. . . . . . . . . 15,238 4,778 32,041 17,805
Selling, general and administrative
expenses . . . . . . . . . . . . . . . 29,230 26,035 83,243 75,593
Amortization of goodwill and
other intangibles. . . . . . . . . . . 9,978 2,673 16,516 7,585
Restructuring and other charges. . . . . 22,159 - 22,159 -
Acquisition related charges. . . . . . . - 3,732 - 3,732
---------- --------- --------- ---------
276,478 128,874 560,807 370,961
---------- --------- --------- ---------
Operating (loss) income . . . . . . . . . (107,690) 22,429 (58,198) 65,652
Equity in earnings of
unconsolidated affiliates. . . . . . . 320 129 609 567
Minority interest . . . . . . . . . . . . (14) (44) (94) (74)
Other income and expenses:
Investment income . . . . . . . . . . . 239 390 653 1,076
Interest expense and other charges. . . (3,564) (993) (7,824) (2,474)
---------- --------- --------- ---------
(3,325) (603) (7,171) (1,398)
---------- --------- --------- ---------
(Loss) income from continuing operations
before income taxes . . . . . . . . . . (110,709) 21,911 (64,854) 64,747
Income tax (benefit) expense. . . . . . . (40,261) 8,740 (23,294) 24,727
---------- --------- --------- ---------
(Loss) income from continuing operations. (70,448) 13,171 (41,560) 40,020
Discontinued operations:
Income from operations of
discontinued operations less
applicable income taxes of $252 . . . . - - - 389
Loss on disposal of discontinued
operations less applicable income
taxes of $2,439 . . . . . . . . . . . . - - - (453)
---------- --------- --------- ---------
- - - (64)
---------- --------- --------- ---------
Net (loss) income . . . . . . . . . . . . $ (70,448) $ 13,171 $(41,560) $ 39,956
========== ========= ========= =========
Basic earnings per share:
(Loss) income from continuing operations $ (1.99) $ 0.36 $ (1.17) $ 1.09
========== ========= ========= =========
Diluted earnings per share:
=========================================
(Loss) income from continuing operations $ (1.99) $ 0.33 $ (1.17) $ 1.01
========== ========= ========= =========
Weighted average common shares. . . . . . 35,355 36,458 35,610 36,635
Weighted average common shares
assuming dilution . . . . . . . . . . . 35,355 39,549 35,610 39,471
<FN>
See accompanying notes
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
September 30, December 31,
1999 1998
------ ------
(In thousands, except share data)
Assets
Current assets
Cash and equivalents $ 28,877 $ 26,013
Marketable securities 228 -
Receivables, net of allowance for uncollectible
amounts of $2,437 ($2,051 at 1998) 140,542 123,427
Accrued revenues 41,991 26,558
Deferred income taxes 7,494 9,336
Other receivable - 11,279
Prepaids 16,455 8,645
Other 15,386 11,968
--------- ---------
Total current assets 250,973 217,226
Property and equipment, at cost less accumulated
depreciation and amortization of $126,307
($128,363 at 1998) 144,071 135,436
Accrued revenues 12,748 7,844
Income tax receivable 4,041 4,041
Goodwill and other intangibles, net 121,742 81,401
Capitalized software costs, net 166,453 220,908
Deferred income taxes 24,371 24,787
Investments 10,427 9,661
Other 17,444 17,394
--------- ---------
Total assets $752,270 $718,698
========= =========
Liabilities
Current liabilities
Accounts payable and accrued expenses $ 47,549 57,129
Current portion of long-term debt 30,400 15,812
Income taxes payable 6,454 9,202
Unearned revenues 20,095 15,804
Accrued restructuring and other charges 4,797 806
Other 776 182
--------- ---------
Total current liabilities 110,071 98,935
Long-term debt 202,000 85,000
Deferred income taxes 69,662 98,233
Accrued restructuring and other charges 6,031 677
Other 9,026 2,843
--------- ---------
Total liabilities 396,790 285,688
--------- ---------
Minority interest 635 526
Stockholders' equity
Special stock, $.01 par value, 5,000,000 shares
authorized - -
Common stock, $.01 par value, 75,000,000 shares
authorized, 35,551,917 shares issued and
outstanding (36,357,139 at December 31, 1998) 356 364
Additional paid-in capital 56,460 82,396
Retained earnings 317,894 359,454
Accumulated other comprehensive income (9,804) (9,730)
Stock employee compensation trust (10,061) -
--------- ---------
Total stockholders' equity 354,845 432,484
--------- ---------
Total liabilities and stockholders' equity $752,270 $718,698
========= =========
<FN>
See accompanying notes
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
Accumulated
Other Stock
Additional Comprehensive Employee
Common Paid-In Retained Income(Loss) Compensation
Stock Capital Earnings (1) Trust Total
----- ------- --------- ------------ --------- ----------
(Dollars in thousands)
BALANCE, DECEMBER 31, 1998. . . $ 364 $ 82,396 $359,454 $(9,730) $ - $432,484
Comprehensive income:
Net loss . . . . . . . . . . . - - (41,560) - - (41,560)
Other comprehensive income,
net of tax:
Foreign currency
translation adjustments . . - - - (74) - (74)
---------
Total comprehensive income
(loss). . . . . . . . . . . . (41,634)
---------
Purchase of shares for SECT . . - - - - (10,094) (10,094)
Restricted stock vested . . . . - (3) - - 19 16
Restricted stock forfeited. . . - - - - 14 14
Stock options exercised
(208,378 shares). . . . . . . 2 7,102 - - 14 7,104
Repurchase of 1,013,600 shares
of common stock . . . . . . . (10) (33,035) - - - (33,045)
--------- --------- --------- -------- --------- ---------
BALANCE, SEPTEMBER 30, 1999 . . $ 356 $ 56,460 $317,894 $(9,804) $(10,061) $354,845
========= ========= ========= ======== ========= =========
<FN>
(1) Comprehensive income (loss) for the three months ended September 30, 1999 and 1998 was
$(67,519) and $14,744, respectively. Comprehensive income for the nine months ended September
30, 1998 was $39,727.
See accompanying notes
POLICY MANAGEMENT SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
---------------------
1999 1998
------ ------
(In thousands)
Operating Activities
Net (loss) income $ (41,560) $ 39,956
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 163,085 58,993
Deferred income taxes (31,369) 1,517
Gain on disposal of discontinued operations - (1,986)
Acquisition related charges - 3,732
Changes in assets and liabilities:
Receivables (10,424) (974)
Accrued revenues (20,195) (4,039)
Other receivable 11,279 -
Accounts payable and accrued expenses (14,312) (14,127)
Accrued restructuring and other charges 13,200 85
Income taxes payable (3,033) 9,036
Unearned revenues 1,772 (7,422)
Other, net (9,170) (5,172)
---------- ---------
Cash provided from operations 59,273 79,599
---------- ---------
Investing Activities
Proceeds from sales/maturities of available-for-
sale securities 1,969 3,257
Proceeds from sales of held-to-maturity securities - 2,969
Proceeds from sale of business segment - 23,826
Acquisition of property and equipment (28,532) (45,287)
Capitalized internal software development costs (50,476) (43,599)
Business acquisitions (68,053) (29,629)
Proceeds from disposal of property and equipment 1,018 1,034
---------
Other (5,888) (6,775)
---------- ---------
Cash used by investing activities (149,962) (94,204)
---------- ---------
Financing Activities
Payments on long-term debt (219,312) (42,319)
Proceeds from borrowing under credit facility 348,900 81,500
Purchase of stock for Stock Employee
Compensation Trust (10,094) -
Issuance of common stock under stock option plans 7,104 28,801
---------
Repurchase of common stock (33,045) (69,660)
---------- ---------
Cash provided (used) by financing activities 93,553 (1,678)
---------- ---------
Net increase (decrease) in cash and equivalents 2,864 (16,283)
Cash and equivalents at beginning of period 26,013 32,179
---------- ---------
Cash and equivalents at end of period $ 28,877 $ 15,896
========== =========
Supplemental Information
Interest paid $ 6,494 $ 1,371
Income taxes paid 6,745 9,806
<FN>
Non-cash investing activities:
The Company transferred $11.2 million of property, plant and equipment
to Lockheed Martin in 1998 in exchange for other receivable collected in 1999.
See accompanying notes
POLICY MANAGEMENT SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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 may
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 either have
been 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. For the
Company, the numerator is the same for the calculation of both basic and diluted
EPS. The denominator for basic and diluted EPS is the same for both the three
and nine month periods ended September 30, 1999 as the loss from operations
would otherwise cause the inclusion of common stock options to be anti-dilutive.
The following is a reconciliation of the denominator used in the EPS
calculations (in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
------------- -------------
1999 1998 1999 1998
----- ----- ----- -----
Weighted Average Shares
- -----------------------
Basic EPS. . . . . . . . . . . 35,355 36,458 35,610 36,635
Effect of common stock options - 3,091 - 2,836
------ ------ ------ ------
Diluted EPS. . . . . . . . . . 35,355 39,549 35,610 39,471
====== ====== ====== ======
Options to purchase 6,708,967 shares of common stock at a weighted average
price of $28.84 per share were outstanding but not included in the computations
of diluted EPS for the three and nine month periods ending September 30, 1999.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to current period
presentation.
NOTE 2. ACQUISITIONS
On June 30, 1999, the Company purchased DORN Technology Group, Inc. ("DORN"), a
risk and claims management company, for $32 million in cash plus additional
consideration of up to $30 million contingent upon the future performance of
DORN, to be expensed as incurred until 2001. DORN owns the Riskmaster claims
management software and the Quest healthcare facility software, and provides
risk and claims management software and services mainly to the US self-insured
market. The Company intends to grow DORN's existing services business and
further develop the Riskmaster and Quest systems to complement its suite of
claims products.
On June 30, 1999, the Company purchased Financial Administrative Services,
Inc.("FAS"), a provider of business process outsourcing ("BPO"), for $13 million
plus additional consideration of up to $12.0 million contingent on the future
performance of FAS, to be capitalized as additional goodwill when paid until
2005. FAS uses the Company's PolicyLink system to support the rapid introduction
of variable insurance products and annuities in a business process outsourcing
environment.
On March 31, 1999, the Company purchased Legalgard Partners, L.P. ("Legalgard"),
a legal cost containment business for $23.2 million plus additional
consideration of up to $4.3 million contingent upon the future performance of
Legalgard, to be expensed as incurred until 2003. Legalgard provides legal cost
containment services mainly to the US property and casualty insurance industry
using the Counsel Partnership System, a proprietary software system. The
Company intends to grow Legalgard's existing services business and develop the
Counsel Partnership System for licensing directly to insurance companies.
The acquisitions above have been recorded using the purchase method of
accounting. Accordingly, the Consolidated Statements of Operations of the
Company do not include the results of operations of the acquired businesses
before their respective dates of acquisition.
NOTE 3. SPECIAL CHARGES
The Company considers special charges to be unusual events or unusual
transactions related to continuing business activities.
The Company's operating results for the 1999 third quarter include $126.9
million in special charges of which $100.4 million are non-cash. These non-cash
charges result from a reevaluation of capitalized software costs in light of an
increasingly rapid pace of change in technology, changes in market forecasts,
and the write-down of certain intangibles largely related to past international
acquisitions. Cash charges of $26.5 million resulted from restructuring charges
incurred as the Company eliminated costs through reductions in force and space
requirements, and charges incurred in connection
with the settlement of the Liberty Life litigation and resolution of disputes
with customers. The Consolidated Statements of Operations include these charges
as follows -
Depreciation and amortization of property, equipment and capitalized
software costs:
Depreciation and amortization of property, equipment and capitalized
software costs includes approximately $94.3 million of accelerated amortization
of capitalized software development costs. In accordance with the Company's
accounting policies and Statement of Financial Accounting Standards No. 86,
these costs were determined in the 1999 third quarter to be unrecoverable.
Amortization of goodwill and other intangibles:
Amortization of goodwill and other intangibles includes approximately $6.1
million of impairment charges related primarily to past international
acquisitions. These impairment charges were determined in the 1999 third
quarter in accordance with the Company's accounting policies and Statement of
Financial Accounting Standards No. 121.
Restructuring and other charges:
Restructuring and other charges includes approximately $12.6 million of
cash charges paid or to be paid as a result of initiatives taken by the Company
in the 1999 third quarter to eliminate costs through worldwide reductions in
force and space requirements.
The remaining $9.6 million of cash charges relate to the settlement of the
Liberty Life litigation, as more fully discussed in Note 4. "Contingencies".
Other costs and expenses:
Other costs and expenses include approximately $3.7 million of costs to
resolve disputes with customers.
Employee compensation and benefits:
Employee compensation and benefits includes approximately $0.6 million of
expatriate taxes.
NOTE 4. CONTINGENCIES
On September 23, 1999, the Company and Liberty Life Insurance Company and
certain of its affiliates ("Liberty") entered into a confidential settlement
agreement of previously disclosed litigation. (See Item 3, Legal Proceedings, of
Part I contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.) As a part of the settlement, both the Company and Liberty
agreed to release the other from all claims asserted and the lawsuit was
dismissed. As a result of the settlement the Company recorded a charge of $9.6
million for legal expenses associated with this litigation.
On April 29, 1999, the Company received notice from the Internal Revenue Service
("IRS") of proposed adjustments to its 1994, 1995 and 1996 federal income tax
returns. Should the IRS prevail in its position, a charge to income of
approximately $16.3 million would result. The Company strongly disagrees
with the proposed adjustments, believes it has meritorious arguments against the
proposed adjustments and intends to vigorously defend its position.
In addition, there are various 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 5. 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 "property and casualty"). 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 "life and financial solutions"). 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 and outsourcing to the property and casualty and life
insurance markets primarily in Europe, Asia, Australia, Canada, Central America
and South Africa.
4. Property and casualty information services. This segment provided
information services, principally motor vehicle records and claims histories, to
US property and casualty insurers. It was sold in August 1997 and is included
in discontinued operations.
5. Life information services. This segment provided information services,
principally physician reports and medical histories, to US life insurers. It
was sold in May 1998 and is included in discontinued operations.
Information about the Company's operations for the three and nine months ended
September 30, 1999 and 1998 is as follows (in thousands):
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
1999 1998 1999 1998
------ ------ ------ ------
REVENUES FROM EXTERNAL CUSTOMERS
Property and casualty. . . . . . . . . . $ 74,032 $ 69,832 $224,747 $203,580
Life and financial solutions . . . . . . 51,837 38,081 141,001 101,842
---------- --------- --------- ---------
Total US revenues. . . . . . . . . . . . 125,869 107,913 365,748 305,422
International. . . . . . . . . . . . . . 42,919 43,390 136,861 131,191
---------- --------- --------- ---------
Total revenues from
continuing operations . . . . . . . $ 168,788 $151,303 $502,609 $436,613
========== ========= ========= =========
Discontinued operations. . . . . . . . . $ - $ - $ - $ 11,968
(LOSS) INCOME FROM CONTINUING OPERATIONS
Property and casualty. . . . . . . . . . $ (67,086) $ 19,688 $(24,602) $ 55,289
Life and financial solutions . . . . . . (1,527) 9,558 17,517 24,049
Corporate and US administrative. . . . . (12,129) (10,000) (28,373) (23,678)
---------- --------- --------- ---------
Total US operating (loss) income . . . (80,742) 19,246 (35,458) 55,660
---------- --------- --------- ---------
International. . . . . . . . . . . . . . (24,996) 5,234 (17,146) 16,104
International administrative . . . . . . (1,952) (2,051) (5,594) (6,112)
---------- --------- --------- ---------
Total international. . . . . . . . . . (26,948) 3,183 (22,740) 9,992
---------- --------- --------- ---------
Operating (loss) income. . . . . . . . (107,690) 22,429 (58,198) 65,652
Equity in earnings of
unconsolidated affiliates. . . . . . . 320 129 609 567
Minority interest. . . . . . . . . . . . (14) (44) (94) (74)
Other income and expenses. . . . . . . . (3,325) (603) (7,171) (1,398)
Income tax (benefit) expense . . . . . . (40,261) 8,740 (23,294) 24,727
---------- --------- --------- ---------
(Loss)income from continuing
operations . . . . . . . . . . . . . $ (70,448) $ 13,171 $(41,560) $ 40,020
========== ========= ========= =========
Discontinued operations
Property and casualty. . . . . . . . . $ - $ - $ - $ (1,018)
Life . . . . . . . . . . . . . . . . . - - - 3,672
Other income and expenses. . . . . . . - - - (27)
Income taxes . . . . . . . . . . . . . - - - (2,691)
---------- --------- --------- ---------
Discontinued operations, net . . . . . $ - $ - $ - $ (64)
========== ========= ========= =========
<FN>
The loss from continuing operations for the three and nine month periods ended
September 30, 1999 included special charges of approximately $126.9 million related
to the following business segments: property and casualty ($85.9 million), life
($10.6 million), international ($26.8 million), and corporate ($3.6 million).
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, 1998.
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:
1999 vs. 1998
Percent
Percentage of Revenues Increase (Decrease)
------------------------ -------------------
Three Nine Three Nine
Months Ended Months Ended Months Months
September 30 September 30 Ended Ended
------------ ------------
1999 1998 1999 1998 September 30
----- ----- ----- ----- --------------------
Revenues
Licensing . . . . . . . . . . . . . . . 22.2% 20.8% 23.1% 20.5% 19% 29%
Services. . . . . . . . . . . . . . . . 77.8 79.2 76.9 79.5 (10) (12)
------- ------ ------ ------
100.0 100.0 100.0 100.0 12 15
------- ------ ------ ------
Operating expenses
Cost of revenues
Employee compensation and benefits . . 46.6 43.0 45.5 44.2 21 19
Computer & communication expenses. . . 7.5 7.2 7.2 6.1 16 36
Depreciation & amortization
of property, equipment &
capitalized software costs. . . . . . 64.3 10.3 28.2 10.7 594 205
Other costs & expenses . . . . . . . . 9.0 3.2 6.4 4.1 219 80
Selling, general &
administrative expenses . . . . . . . 17.3 17.2 16.6 17.3 12 10
Amortization of goodwill and
other intangibles . . . . . . . . . . 5.9 1.8 3.3 1.7 273 118
Restructuring and other charges . . . . 13.2 - 4.4 - - -
Acquisition related charges . . . . . . - 2.5 - .9 - -
------- ------ ------ ------
163.8 85.2 111.6 85.0 115 51
------- ------ ------ ------
Operating (loss) income. . . . . . . . . (63.8) 14.8 (11.6) 15.0 (580) (189)
Equity in earnings of unconsolidated
affiliates. . . . . . . . . . . . . . 0.2 0.1 0.1 0.1 148 7
Other income and expenses. . . . . . . . (2.0) (0.4) (1.4) (0.3) 451 413
------- ------ ------ ------
(Loss) income from continuing operations
before income taxes. . . . . . . . . . (65.6) 14.5 (12.9) 14.8 (605) (200)
Income tax (benefit) expense . . . . . . (23.9) 5.8 (4.6) 5.6 (560) (194)
------- ------ ------ ------
(Loss) income from continuing operations (41.7) 8.7 (8.3) 9.2 (634) (204)
Discontinued operations, net . . . . . . - - - - - -
------- ------ ------ ------
Net (loss) income. . . . . . . . . . . . (41.7)% 8.7% (8.3)% 9.2% (634)% (204)%
======= ====== ====== ======
THREE MONTH COMPARISON
REVENUES
Three Months
Ended September 30,
-------------------
Licensing 1999 1998 Change
----- ----- ------
(Dollars in millions)
Initial charges. . . . . . . $19.2 $14.7 31%
Monthly charges. . . . . . . 18.1 16.8 8
------ ------
Total licensing revenues . . 37.3 $31.5 18%
====== ======
Percentage of total revenues 22.1% 20.8%
------ ------
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 charges increased $4.6 million for the third quarter of
1999 compared with the third quarter of 1998, with the following increases by
business segment: property and casualty up 122% ($5.6 million) primarily
related to Point, internet and claims products; life and financial solutions
down 19% ($1.1 million) with increases in life enterprise systems licensing more
than offset by weak licensing of lending products; and international up 2% ($0.1
million).
Initial license charges for the third quarter of 1999 include $2.0 million of
right-to-use licenses. This compares with $2.7 million in right-to-use licenses
for the third quarter of 1998. Right-to-use licenses represent the acquisition
by certain customers of the right-to-use component of their remaining monthly
license charge obligation, if any, plus the acquisition of a perpetual
right-to-use the product thereafter. Since these types of licenses represent an
acceleration of future revenues, they reduce future monthly license charges. The
Company expects the occurrences of right-to-use licenses will be reduced in the
future.
Monthly license charges increased $1.3 million for the third quarter of 1999
compared with the third quarter of 1998 with the following increases or
decreases by business segment: property and casualty down 7% ($0.6 million) due
to weak 1998 licensing and the effect of right-to-use licenses; life and
financial solutions up 32% ($1.2 million) on strong 1998 initial license
activity; and international up 18% ($0.7 million) principally due to increased
licensing revenues in the United Kingdom and the Asia/Pacific region during
1998.
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:
1999 1998 1997
------------------ -------------------------- ----
3rd 2nd 1st 4th 3rd 2nd 1st 4th
------------------ ------------------------- ----
(Dollars in millions)
Initial license revenues $19.2 $25.6 $18.7 $27.3 $14.7 $13.0 $12.6 $25.1
% of total revenues 11% 15% 12% 16% 10% 9% 9% 17%
The increasing rate of change in the insurance and banking industries
coupled with the rapid evolution of eCommerce technology and the volatility of
initial license revenues, as illustrated by the above table, is leading the
Company to consider new business models that place less emphasis on initial
license revenue and place more emphasis on transaction based revenue. The
Company expects this transition to occur gradually over the next several years
and will likely affect the amount and timing of revenue recognized in the
Company's financial statements.
Three Months
Ended September 30,
-------------------
Services 1999 1998 Change
----- ----- ------
(Dollars in millions)
Professional and ITO . . . . $104.6 $106.0 (1)%
Business Process Outsourcing 26.2 12.6 108 %
Other. . . . . . . . . . . . 0.6 1.3 (54)%
------- -------
Total Services . . . . . . . $131.4 $119.9 10 %
======= =======
Percentage of total revenues 77.9% 79.2%
------- -------
Total Services revenues increased $11.5 million for the third quarter of 1999
compared with the third quarter of 1998, with the following increases or
decreases by business segment: property and casualty down 1% ($0.8 million)
with declines in implementation related professional services due to the effect
of weak 1998 licensing and the redeployment of staff from customers' Y2K
projects ending late last year partially offset by a 25% increase in BPO; life
insurance and financial solutions up 48% ($13.6 million) reflecting
approximately 12% growth in traditional professional services and strong growth
in BPO; and international down 4% ($1.3 million) with increases in Europe being
offset by decreases in the Asia/Pacific region.
OPERATING EXPENSES
COST OF REVENUES
Employee compensation and benefits increased 21% for the third quarter of
1999 compared with the third quarter of 1998. The net increase results
principally from higher salary costs in property and casualty and life
professional services and the costs associated with growth in staffing in fast
growing areas such as claims, lending, eCommerce and BPO. Compensation and
benefits increased 11% ($2.1 million) internationally and 25% ($11.5 million)
domestically.
Computer and communications expenses increased 16% for the third quarter of 1999
compared with the third quarter of 1998. This increase is principally the result
of increased: communications volumes; network and PC related expenses; and
license fees for data center operating software.
Depreciation and Amortization increased significantly over the 1998 third
quarter principally due to the write-off or write-down of certain software
described below under "Special charges". Excluding these charges, depreciation
and amortization decreased 9% as a result of the 1999 third quarter benefit from
the write-offs partially offset by increased software amortization related to
product releases during the last twelve months and increased depreciation of
property and equipment. As a percentage of revenue, depreciation and
amortization, excluding special charges, decreased to 8% from 10% in the 1998
third quarter.
Other operating costs and expenses increased approximately $10.5 million
over the 1998 third quarter primarily due to approximately $3.7 million of
charges related to the resolution of customer disputes. The remaining increase
is due to rent on new facilities, higher non-billable travel, and a decrease in
the amounts capitalized related to software and internal use systems.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 12% for the third
quarter of 1999 compared with the third quarter of 1998, but remained relatively
unchanged as a percentage of revenue.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles increased significantly over
the 1998 third quarter principally due to the write-off or write-down of certain
acquisition intangibles discussed below under "Special charges". Before the
effect of these charges, amortization of goodwill and intangibles increased 47%
due to the acquisitions of The Leverage Group, Inc. in the third quarter of
1998, and Legalgard, Dorn and FAS in prior 1999 quarters.
SPECIAL CHARGES
The Company considers special charges to include unusual events or unusual
transactions related to continuing business activities.
During the 1999 third quarter, the Company commenced assessments of all
major aspects of its business based upon the increasing rate of change in
technology in its marketplace due to the internet and the rapid adoption of
eCommerce. In addition, the Company also initiated a number of international and
domestic restructuring and cost reduction initiatives. This assessment included
various international and domestic intangibles and capitalized software costs.
As a result of actions taken in the 1999 third quarter, the Consolidated
Statements of Operations includes special charges of approximately $126.9
million as follows -
Depreciation and Amortization of property, equipment and capitalized
software costs:
Depreciation and amortization of property, equipment and capitalized
software costs includes approximately $94.3 million of non-cash, accelerated
amortization of capitalized software development costs that were determined in
the 1999 third quarter to be unrecoverable.
Approximately $77.6 million of this amount relates to several of the
Company's software products that use third party technology that is rapidly
becoming obsolete. The single largest component of this charge relates to IBM
OS/2 components of Series III , which will no longer be marketed. The second
largest component relates to out-of-date, mainframe, batch processing
technology. The remainder relates to several products based on older
programming languages that will not be marketed in the future.
The remaining $16.7 million of the $94.3 million of accelerated
amortization relates to other products that will no longer be marketed for
numerous reasons unrelated to technological change.
Of the total $94.3 million, $77.6 million relates to the property and
casualty group and $16.7 million relates to the international group.
The Company has ceased marketing the written-off or written-down products and
any future cost associated with the continued support of these products will be
expensed as incurred.
The amount of these charges was determined in accordance with the Company's
accounting policies and Statement of Financial Accounting Standards No. 86.
Following the Company's third quarter decision to cease marketing these
products, the Company determined the estimated net realizable value of each
product. If net book value exceeded net realizable value, then net book value
was reduced to its estimated net realizable value.
Amortization of goodwill and other intangibles:
Amortization of goodwill and other intangibles includes approximately $6.1
million of accelerated amortization of intangibles that were determined in the
1999 third quarter to be impaired in accordance with the Company's accounting
policies and Statement of Financial Accounting Standards no. 121. These
intangibles relate primarily to past international acquisitions for which the
Company estimates projected net cash flows will not be adequate to recover its
unamortized investments.
Restructuring and other charges:
Restructuring and other charges, which are discussed below, may be
summarized as follows as of September 30, 1999 (in millions) -
1999
Third
Quarter To Be
Charges Paid Paid
-------- ------ ------
Facilities. . . . . $ 5.3 $ - $ 5.3
Personnel . . . . . 7.3 2.2 5.1
Litigation. . . . . 9.6 6.7 2.9
----- ---- -----
Total restructuring
and other charges $22.2 $8.9 $13.3
===== ==== =====
Restructuring and other charges includes approximately $12.6 million of
cash charges paid or to be paid as a result of initiatives taken by the Company
in the 1999 third quarter to eliminate costs through worldwide reductions in
force and space requirements. Approximately $7.3 million of this amount relates
to benefits payable to staff who were terminated. Approximately $5.3 million of
this amount relates to minimum lease obligations remaining on vacated offices,
reduced by estimated sublease income. The charges related primarily to actions
taken in the property and casualty and international business groups.
The remaining approximately $9.6 million of cash charges relates to the
settlement of the Liberty Life litigation. On September 23, 1999, the
Company and Liberty Life Insurance Company and certain of its affiliates
("Liberty") entered into a confidential settlement agreement of previously
disclosed litigation. (See Item 3, Legal Proceedings, of Part I contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.) As a
part of the settlement, both the Company and Liberty agreed to release the other
from all claims asserted and the lawsuit was dismissed. As a result of the
settlement the Company recorded a loss of $9.6 million for legal expenses
associated with this litigation.
Other costs and expenses:
Other costs and expenses includes approximately $3.7 million of costs to
resolve disputes with customers.
Employee compensation and benefits:
Employee compensation and benefits includes approximately $0.6 million of
expatriate taxes.
OPERATING INCOME (LOSS)
The 1999 third quarter produced an operating loss of $107.6 million
compared with the 1998 third quarter operating income of $22.4 million resulting
primarily from the write-off or write-down of certain software, intangibles
related to business acquisitions and restructuring and other charges described
above, Before these charges, 1999 third quarter operating
income decreased 26% compared with the 1998 third quarter. Also before these
charges, decreases in segment operating income were: property and casualty
decreased 5%, life and financial solutions decreased 5% and international
decreased 65% (see discussion of "Revenues" and "Operating Expenses" above).
OTHER INCOME AND EXPENSE
Other income and expense is comprised primarily of interest expense which
increased $2.6 million for the third quarter of 1999 compared with the third
quarter of 1998. This increase is due to higher levels of borrowed funds under
the Company's credit facilities which were incurred principally to finance
business acquisitions and repurchases of the Company's stock during prior
periods. The average nominal interest rate applicable to borrowings under the
Company's credit facilities during the third quarter of 1999 was 5.7%.
INCOME TAXES
The effective income tax (benefit) rate (income taxes expressed as a percentage
of pre-tax income) on continuing operations including special charges was 36.4%
and 39.9% for the third quarter of 1999 and 1998, respectively. The effective
income tax rate on continuing operations before special charges was 33.1% for
the third quarter of 1999.
The effective income tax rate on continuing operations before special charges
for the third quarter of 1999 was lower than the federal statutory rate of 35%
principally due to the effect of foreign income taxes from operations in
countries with tax rates lower than the United States.
NINE MONTH COMPARISON
REVENUES
Nine Months
Ended September 30,
-------------------
Licensing 1999 1998 Change
----- ----- ------
(Dollars in millions)
Initial charges. . . . . . . $ 63.5 $40.3 58%
Monthly charges. . . . . . . 52.3 49.4 6
------- ------
Total licensing revenues . . $115.8 $89.7 29%
======= ======
Percentage of total revenues 23.0% 20.5%
------- ------
Initial license revenues increased $23.2 million for the first nine months
of 1999 compared with the first nine months of 1998, with the following
increases by business segment: property and casualty up 163% ($21.3 million)
with increases in Point, internet and claims products, one new S3+ license and
two S3+ license expansions, combined with increased revenue from right-to-use
transactions; life and financial solutions up 7% ($0.9 million)with increases in
life enterprise system licenses offset partially by declines in lending system
licenses; and international up 7% ($1.0 million) with increases in continental
Europe offset partially by declines in the United Kingdom and the Asia/Pacific
region.
Initial license charges for the first nine months of 1999 include right-to-use
licenses of $13.7 million compared with $9.7 million for the first nine months
of 1998. Right-to-use licenses represent the acquisition by certain customers
of the right-to-use component of their remaining monthly license charge
obligation, if any, plus the acquisition of a perpetual right-to-use the product
thereafter. Since these types of licenses represent an acceleration of future
revenues, they reduce future monthly license charges. The Company expects the
occurrence of right-to-use licenses will be reduced in the future.
Initial license charges for the first three quarters of 1999 include a $2.9
million license with the former owners of Legalgard. In addition, the former
owners of FAS licensed several of the Company's life and financial solutions
products for $2.0 million.
Two remarketing agreements for the Claims Outcome Advisor ("COA ")
product, totaling $3.5 million, are included in initial licensing revenues for
the first nine months of 1999. These non-exclusive agreements provide two of the
Company's nationally recognized vendors the right to re-license COA to the
self-insured market. The Company also renegotiated an extension to its long-term
license agreement for operating software used in the Company's data center with
one of these vendors.
Initial license charges for the first three quarters of 1999 also include $2.6
million of revenue from the sale of hardware remarketed by the Company in
conjunction with licenses of its software.
Monthly license charges increased $2.9 million for the first nine months of
1999 compared with the first nine months of 1998 with the following increases or
decreases by business segment: property and casualty down 12% ($3.3 million)
due to weak 1998 licensing and the effect of right-to-use licenses; life and
financial solutions up 43% ($4.5 million) on strong 1998 initial license
activity; and international up 14% ($1.7 million) principally due to increased
licensing activity in 1998.
Nine Months
Ended September 30,
-------------------
Services 1999 1998 Change
----- ----- ------
(Dollars in millions)
Professional and ITO . . . . $ 325.6 $310.4 5%
Business Process Outsourcing 58.4 33.0 77
Other. . . . . . . . . . . . 2.8 3.5 (20)
-------- ------
Total Services . . . . . . . $ 386.8 $346.9 12%
======== ====== ======
Percentage of total revenues 77.0% 79.5%
---------------
Total Services revenues increased $39.9 million for the first nine months of
1999 compared with the first nine months of 1998, with the following increases
by business segment: property and casualty up 2% ($3.2 million) with a 6%
decline in professional and ITO services offset by a 44% rise in BPO; life
insurance and financial solutions up 43% ($33.8 million) with a 27% increase in
professional and ITO services enhanced by a 185% increase in BPO;
and international up 3% ($2.9 million) all in professional and ITO services. The
rise in BPO revenue reflects increased volume with existing customers.
OPERATING EXPENSES
COST OF REVENUES
Employee compensation and benefits increased 19% for the first nine months
of 1999 compared with the first nine months of 1998. The net increase results
principally from higher salary costs in property and casualty and life
professional services, and the costs associated with growth in staffing in such
fast growing areas as claims, lending, eCommerce and BPO. These increases were
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. Compensation and benefits increased 13% ($7.6
million) internationally and 21% ($29.0 million) domestically.
Computer and communications expenses increased 36% for the first nine months of
1999 compared with the first nine months of 1998. At the beginning of the third
quarter of 1998, the company entered into a data center outsourcing agreement
with Lockheed Martin entered into June 30, 1998. As a result, certain costs
previously included in employee compensation and benefits are now included in
computer and communication expense. The savings from the outsourcing agreement
were offset due primarily to increases in communications volumes, network and PC
related expenses and increased license fees for data center operating software.
Depreciation and Amortization increased significantly for the first nine months
of 1999 compared with the first nine months of 1998 principally due to the
write-off or write-down of certain software described below under "Special
charges". Excluding these charges, depreciation and amortization increased 2%
due to increased software amortization related to product releases during the
last twelve months and increased depreciation of property and equipment
partially offset by the benefit of the third quarter charges. As a percentage of
revenue, depreciation and amortization, excluding the charges decreased to 9% of
revenue from 11% in the first nine months of 1999 compared with the first nine
months of 1998.
Other operating costs and expenses increased 80% for the first nine months of
1999 compared with the first nine months of 1998, due to the inclusion of
approximately $3.7 million of charges related to the resolution of disputes with
customers and $2.4 million of costs for computer hardware sold to customers in
conjunction with software licenses in which the corresponding revenue is
included in initial licensing revenue. Other increases for the first nine
months of 1999 include rent on new facilities, higher non-billable travel, and a
decrease in the capitalization of software and internal use systems costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 10% for the first
nine months of 1999 compared with the first nine months of 1998, but declined
slightly as a percentage of revenue.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Amortization of goodwill and other intangibles increased 118% for the first
nine months of 1999 compared with the first nine months of 1998, principally due
to the impairment charges recorded in the third quarter which are described
above under "Special charges". Amortization related to the acquisition of The
Leverage Group, Inc. in the third quarter of 1998 and Legalgard, Dorn and FAS in
prior 1999 quarters also contributed to the increase.
SPECIAL CHARGES
As discussed under "Three Month Comparison" the Company recorded special
charges of approximately $126.9 million in the 1999 third quarter.
OPERATING INCOME (LOSS)
The 1999 nine month period produced an operating loss of $58.2 million
compared with the 1998 operating income of $65.7 million resulting primarily
from the write-off or write-down of certain software, intangibles related to
business acquisitions and restructuring, and other charges described above in
"Special charges". Before these charges, operating income for the first nine
months of 1999 decreased 1% compared with the first nine months of 1998. Also
before these charges, increases or decreases in segment operating income were:
property and casualty increased 11%, life and financial solutions increased 17%
and international decreased 40% (see discussion of "Revenues" and "Operating
Expenses" above).
OTHER INCOME AND EXPENSE
Other income and expense is comprised primarily of interest expense which
increased $5.3 million for the first nine months of 1999 compared with the first
nine months of 1998, principally due to higher levels of borrowed funds under
the Company's credit facility to finance business acquisitions and repurchases
of the Company's stock. The average nominal interest rate applicable to
borrowings under the Company's credit facility during the first nine months of
1999 was 5.4%.
INCOME TAXES
The effective income tax (benefit) rate (income taxes expressed as a
percentage of pre-tax income) on continuing operations including special charges
was 35.9% and 38.2% for the nine months ended September 30, 1999 and 1998,
respectively.
The effective income tax rate on continuing operations before special charges
was 36.0% for the nine months ended September 30, 1999. The effective income
tax rate decreased 2.3% for the first nine months of 1999 compared to the same
period in 1998, principally due to the effect of foreign income taxes from
operations in countries with tax rates lower than in the United States.
LIQUIDITY AND CAPITAL RESOURCES
September 30, December 31,
1999 1998
- ---------------------------------------------------------
(Dollars in millions)
Cash and equivalents and marketable
securities. . . . . . . . . . . . $ 29.1 $ 26.0
Current assets. . . . . . . . . . . 251.0 217.2
Current liabilities . . . . . . . . 110.1 98.9
Working capital . . . . . . . . . . 140.9 118.3
Long-term debt. . . . . . . . . . . 202.0 85.0
Nine Months Ended
September 30,
1999 1998
- -----------------------------------------------------------------
(Dollars in millions)
Cash provided by operations. . . . . . . . . $ 59.3 $ 79.6
Cash (used) by investing activities. . . . . (150.0) (94.2)
Cash provided (used) by financing activities 93.6 (1.7)
The Company's current ratio (current assets divided by current liabilities)
stood at 2.3 at September 30, 1999, which management believes is sufficient when
combined with available credit facilities to provide for day-to-day operating
needs and the flexibility to take advantage of investment opportunities. At
September 30, 1999, the Company had $240 million of committed and $20 million of
uncommitted credit facilities available to it, of which $230.4 million had been
utilized. On November 5, 1999 the Company entered into a new committed credit
facility of $70 million replacing $40 million of the $240 million bringing total
committed to $270 million. In addition, the Company reduced its uncommitted
facility to $5 million.
During the nine months ended September 30, 1999 the Company capitalized software
development costs of $50.5 million, principally related to the development of
its property and casualty, life and international enterprise software products
and claims, eCommerce and banking solutions.
Significant expenditures anticipated for the remainder of 1999, excluding any
possible business acquisitions or common stock repurchases, are as follows:
acquisition of computer and communications equipment, support software, 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, capital expenditures, 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 may 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 and financial solutions industries. Significant
changes in the regulatory or market environment of these industries could impact
demand for the Company's software products and services. Additionally, there is
increasing competition for the Company's products and services, and there can be
no assurance that the Company's current products and services will remain
competitive, or that the Company's development efforts will produce products
with the cost and performance characteristics necessary to remain competitive.
Furthermore, the market for the Company's products and services is characterized
by rapid changes in technology and the emergence of the Internet as a viable
insurance distribution channel. In response to these changes the Company is
continually reassessing and challenging all major aspects of its business for
the purpose of evaluating whether it is correctly positioned to maximize its
potential. The Company's success will depend on the level of market acceptance
of the Company's products, technologies and enhancements, and its ability to
introduce such products, technologies and enhancements to the market on a timely
and cost effective basis, and maintain a labor force sufficiently skilled to
compete in the current environment.
The timing and amount of the Company's revenues are subject to a number of
factors, such as the timing of customers' decisions to enter into large license
agreements with the Company, which make estimation of operating results prior to
the end of a quarter or year extremely uncertain. Additionally, while management
believes that the Company's financing needs for the foreseeable future will be
satisfied from cash flows from operations and the Company's currently existing
credit facilities, 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.
A significant portion of both the Company's revenue and its operating income is
derived from initial licensing charges received as part of the Company's
software licensing activities. Because a substantial portion of these revenues
is recorded at the time new systems are licensed, there can be significant
fluctuations from period to period in the revenues and operating income derived
from licensing activities. This is attributable principally to the timing of
customers' decisions to enter into license agreements with the Company, which
the Company is unable to control. The Company believes that current and
potential customers' decisions to enter into license agreements with the Company
may be significantly affected by strategies to make their existing information
systems capable of handling the year 2000, however, at this time the Company is
unable to predict what the future impact, if any, will be. The Company's
licensing revenues have included significant amounts of right-to-use licenses
and the Company expects the occurrence of these licenses will be reduced in the
future.
The increasing rate of change in the insurance and banking industries coupled
with the rapid evolution of eCommerce technology and the volatility of initial
licensing revenue is leading the Company to consider new business models that
place less emphasis on initial license revenue and more emphasis on transaction
based revenue. The Company expects this transition to occur gradually over the
next several years and will likely affect the amount and timing of revenue
recognized in the Company's financial statements.
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.
The following seven phases 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 remediation requirements for each component in order of
business risk prioritization determined during Triage.
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. Subjecting customer products and internal systems that the Company
relies upon to support its business to tests designed to identify issues related
to date calculations, functions and routines that are affected by the Year 2000
change. Such tests include both system and integrated tests in environments
with machine dates advanced to dates in the years 1999 and 2000 ("Time Machine
Environment").
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.
The Company has substantially completed all related tasks within the
project phases presented above. A small amount of product re-testing to
adequately address discrepancies identified during Time Machine testing remains.
These tests are expected to be completed in November. The Company will continue
to remediate products based on vendor compliance updates as they are released
and will continue to perform redundant tests on hardware and software until year
end.
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, into, and beyond the Year 2000. Tests performed on these
primary products have confirmed the ability of these applications to accurately
process data in both centuries. Additional testing on the Company's base
products was completed during the first half of 1999 in a Time Machine
Environment. This additional testing has sought to confirm that no
unanticipated problems will occur due to third party products with which the
Company's applications are designed to operate.
Service Offerings
- ------------------
The Company has completed Year 2000 application code remediation for
customers who will be Business Process Outsourcing ("BPO")/Information
Technology Outsourcing ("ITO Services") customers after December 31, 1999. Live
customer data that spans Year 2000 thresholds is currently, and has been,
successfully processed by these remediated applications in production
environments. Additionally, subsequent tests have been performed on customer
products and additional redundant testing will continue to occur in Year 2000
Time Machine Environments until year end 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, assessments, remediation, and testing
efforts in order to satisfy Year 2000 requirements. Redundant tests for Year
2000 compliance of the hardware and operating software in the Blythewood data
center will continue until year end.
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 Lockheed Martin. The Company's Australian and
European data centers have completed their inventory and assessment of hardware
and operating software for Year 2000 requirements. Finalization of the project
for all data centers is substantially complete.
Re-tests of software will continue until year end 1999, as will the application
of upgrades to third party products when additional enhancements and fixes are
released.
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 financial components of the selected solution are
operational; however, only limited human resources functionality has been
implemented at this time. The human resources functionality of the legacy
systems that remain have been tested and verified to be Year 2000 ready.
The Company has inventoried, assessed and remediated its networks and PC
hardware and software as required. The Company has also completed assessment and
remediation of non-IT systems that 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"). Mission critical
suppliers and trading partners have been identified and tests of most of these
interfaces, to the extent practical, have been performed in a Year 2000
environment. The Company's ability to influence cooperation is partially
dependent on the significance of the Company's relationship with its suppliers
and trading partners and their willingness to share such information. The
Company has completed this phase of its Year 2000 readiness project.
Year 2000 Costs
- -----------------
Since 1993, the Company estimates that it has incurred approximately $21.3
million of costs in addressing Year 2000 remediation issues. These remediation
costs were funded by operations and the Company does not expect to incur any
additional costs for the remainder of the year.
Year 2000 Risks
- -----------------
The Company's products are designed to be used with and require the 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.
Furthermore, there is a general uncertainty inherent in the Year 2000 problem
stemming, in part, from the uncertainty of the Year 2000 readiness of
third-party suppliers and the Company's customers and prospective customers.
For these reasons, 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 will continue to modify and finalize contingency and staffing plans
for worldwide coverage, as applicable, until year end.
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" above.
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 4, 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 filed a report under Item 5 Other Events on October 5, 1999
disclosing that it expected third quarter earnings to be in the range of $.31 to
$.36 per share before special and restructuring charges. No financial
statements were filed with this 8-K.
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 12, 1999 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 September 2, 1999
incorporating all amendments thereto subsequent to July 19, 1994 (filed
herewith)
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. 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)
B. 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)
C. 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)
D. 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)
E. 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)
F. 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)
G. 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)
H. 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)
I. 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)
J. 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)
K. 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)
L. 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)
M. 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)
N. 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)
O. 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)
P. 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)
Q. 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)
R. 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)
S. 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)
T. 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)
U. 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)
V. Employment Agreement Form dated November 7, 1996 for Messrs.
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)
W. 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)
X. Stock Option/Non-Compete Form Agreement for named executive officers
together with 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)
Y. Form of Amendment No. 1 to the Employment Agreements with Messrs.
Morrison and Williams, together with schedule identifying particulars for each
executive officer (filed as an Exhibit to Form 10Q for Quarter ended June 30,
1997 and is incorporated herein by reference)
Z. Form of Employment Agreements with Messrs. Wilson and Bailey, together
with schedule identifying particulars for each executive officer (filed as an
Exhibit to Form 10-Q for Quarter ending September 30, 1997 and is incorporated
herein by reference)
AA. 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 Quarter ending September 30, 1997 and is
incorporated herein by reference)
BB. 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 the Form 10Q for the quarter ended March 31, 1998, and
is incorporated herein by reference)
CC. Policy Management Systems Corporation Restricted Stock Ownership Plan
(filed as an Exhibit to Form 10-Q for Quarter ended September 30, 1998 and is
incorporated herein by reference)
DD. Form of Restricted Stock Award Agreement dated August 11, 1998 with
Messrs. Berkeley, Feddersen, Palms, Sargent, Seibels and Trub (filed as an
Exhibit to Form 10-Q for Quarter ended September 30, 1998 and is incorporated
herein by reference)
EE. Employment Agreement with Michael W. Risley dated February 23, 1999,
effective November 10, 1998 (filed as an Exhibit to Form 10-K for the year ended
December 31, 1998 and is incorporated herein by reference)
FF. Form of Restricted Stock Award Agreement dated March 1, 1999 with
Messrs. Berkeley, Feddersen, Palms, Sargent, Seibels and Trub (filed as an
Exhibit to Form 10-Q for Quarter ending March 31, 1999 and is incorporated
herein by reference)
GG. Form of Restricted Stock Award Agreement for named executive officers
together with schedule identifying particulars for each named executive officer
(filed as an Exhibit to Form 10-Q for Quarter ending March 31, 1999 and is
incorporated herein by reference)
HH. 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 Quarter ending June 30, 1999 and is
incorporated herein by reference)
II. Stock Option/Non-Compete Form Agreement with Michael W. Risley dated May
11, 1999 (filed as an Exhibit to Form 10-Q for Quarter ending June 30, 1999 and
is incorporated herein by reference)
JJ. Form of 1999 Bonus Plan for named executive officers together with
schedule identifying particulars for each named executive officer (filed as an
Exhibit to Form 10-Q for Quarter ending June 30, 1999 and is incorporated herein
by reference)
KK. Promissory Note dated July 21, 1999 between Policy Management
Systems Corporation and First Union National Bank (filed herewith)
27. FINANCIAL DATA SCHEDULE
A. Filed herewith