-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KzBmvAlNyGsNJzWlfyWcX0JmaZ0zbZtDC5o0z0b3Vkl8YSBtvjQNiYxIXzQiTK8m jdaIX3KYg7kEaPt0xLSTwA== 0000356226-00-000002.txt : 20000403 0000356226-00-000002.hdr.sgml : 20000403 ACCESSION NUMBER: 0000356226-00-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLICY MANAGEMENT SYSTEMS CORP CENTRAL INDEX KEY: 0000356226 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 570723125 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10557 FILM NUMBER: 589273 BUSINESS ADDRESS: STREET 1: ONE PMSC CTR STREET 2: PO BOX TEN CITY: COLUMBIA STATE: SC ZIP: 29202 BUSINESS PHONE: 8037354000 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 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 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: NONE 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x --- The aggregate market value of the voting stock held by non-affiliates of the registrant was $312,553,830 at March 27, 2000, based on the closing market price of the Common Stock on such date, as reported by the New York Stock Exchange. The total number of shares of the registrant's Common Stock, $.01 per share par value, outstanding at March 27, 2000, was 35,586,100. DOCUMENTS INCORPORATED BY REFERENCE Specified sections of the registrant's 2000 Proxy Statement in connection with its 2000 Annual Meeting of Stockholders are incorporated by reference in Part III hereof. PART I ITEM 1. BUSINESS THE COMPANY ORGANIZATION AND GENERAL DEVELOPMENT Policy Management Systems Corporation (the "Company"), a leading provider of enterprise software and electronic commerce systems, related professional services, and business process outsourcing designed to meet the needs of the global insurance and related financial services industries, is a South Carolina corporation incorporated in 1980. From 1974 until 1980, the Company operated as a division of Seibels, Bruce & Company. The Company initially operated as a provider of insurance software systems and related automation support services to the property and casualty insurance market in the United States and Canada. Over time, the Company has expanded geographically into Europe, Asia, Australia, Africa and Latin America as well as into the life insurance and related financial services markets. Through internal development and acquisitions, the Company has expanded its software products and services offerings which include advanced computing technologies, strategic alliances, and outsourcing solutions, thereby strengthening the Company's ability to serve the global insurance marketplace. BUSINESS STRATEGY The Company's business strategy is to offer value to customers by structuring long-term relationships and agreements that provide its customers with continuously updated solutions, while providing a high degree of recurring revenues to the Company. During the early stages of the Company's development, a major portion of its revenues was derived from systems licensing activities. The Company has continued to expand as a provider of a full range of business solutions to the global insurance and financial services industries and now the majority of the Company's revenues are derived from outsourcing and professional services activities. NAME CHANGE On January 21, 2000, the Company announced its intent to change the name of the Company to Mynd Corporation. Approval requires a two-thirds vote of the shareholders at the annual shareholders meeting scheduled for May 9, 2000. If approved by the shareholders, the Company will formally change its legal name with relevant authorities including the New York Stock Exchange. Meanwhile, management intends to proceed with a campaign to promote acceptance and awareness of the new name. SOFTWARE PRODUCTS The Company offers over 100 business solutions, which include more than 80 application software systems, designed to meet the needs of the global insurance and related financial services markets. The Company's software products automate most insurance processing functions, including various underwriting, claims, accounting, financial reporting, regulatory reporting and cash management functions. The systems have been designed to permit ease of use, providing flexibility in adapting to a customer's specific requirements. The systems are also designed to be modular in structure and to facilitate the application of updates and enhancements, as well as the interfacing and integration with different systems. Most of the Company's applications will operate on either a stand-alone basis or in conjunction with other applications in the same product group. The Company's primary software systems currently run on midrange and mainframe hardware with personal computers. The Company also supports an open systems strategy, which provides for the host-based software components to be converted to certain open platforms, allowing customers the capability of adding cost-effective increments of processing power. The Company's systems incorporate object-oriented technology and most applications are Internet-enabled (see Product Development). The Company's enterprise systems represent comprehensive administrative offerings for the property and casualty and life insurance markets. A primary advantage of the Company's software products is the full integration of the information and data gathering, processing, underwriting, claims handling and reporting processes for insurance providers and self-insureds, creating a cooperative processing environment. In this environment, insurance professionals are capable of processing multiple tasks concurrently with minimal clerical support and data entry. The Company's software products utilize technologies such as relational databases, graphical user interfaces, object-oriented programming, imaging and web browser enablement. The Company's objective is to provide software systems that allow system upgrades, additions and interfaces to be implemented quickly, with minimal disruption to ongoing operations. The Company obtains licenses from third parties for a wide range of software products and services, which are required in varying degrees to develop and enhance the Company's products and in performing services for its customers. Such products range from mainframe operating systems to graphical user interfaces. The Company's primary software systems, as well as some of its newest product offerings, are discussed below. Series III uses relational databases and cooperative processing between hardware platforms and allows access to data from multiple sources through advanced networks to provide both a comprehensive solution for all facets of the property and casualty insurance industry worldwide and a flow of information between insurance agents, branch offices and the home office of insurance companies. The completion of Release 9.1 of Series III marked the first release of Series III functionality utilizing the Microsoft Windows NT operating system and resulted in it being renamed S3+ (All subsequent references to Series III will be S3+). S3+ is currently able to support business processing for personal lines (primarily auto and homeowners' policies) and commercial lines (Commercial Auto, Commercial Package Policy, Commercial Property, Crime, Liability, and Inland Marine) for the property and casualty insurance industry in a Windows NT environment. The continued development of S3+ will focus on enhancements of existing functionality and incorporating Windows NT operating system capability with eBusiness solutions. The S3+ product line includes several eBusiness-based products including PMSCiSolutions , Business Intelligence Solutions , Document Solutions , and Media View . The Company also continues to provide solutions to the property and casualty insurance industry through its Series II products, an earlier generation of solutions, which are traditional mainframe computer products. Series II products have been enhanced with the capability of handling transactions with dates of the year 2000 and beyond. The POINT System, the Company's midrange solution for the United States property and casualty insurance market, has been re-engineered to utilize client/server capabilities featuring a graphical user interface client. The re-engineered POINT System, renamed Point+ , utilizes object-oriented technology and is offered on International Business Machines Corporation's ("IBM") AS/400 and Windows NT. INSURE/90 , an IBM AS/400-based product acquired with Creative Holdings Group, Limited ("Creative") in 1994, became part of the Company's general insurance software solution to the European, Asian and Australian markets. The next generation of applications to ultimately replace the INSURE/90 product is I+ . I+ increases functionality and offers client/server capabilities. The Company's acquisition of CYBERTEK Corporation ("CYBERTEK") in August 1993 provided the Company with the CK/4 Enterprise Solution , an integrated solution for the life insurance industry. In March 1995, the Company made generally available the first release of CyberLife , an integration of CK4 functionality with client/server technology. The Company's subsequent releases of CyberLife's scalable platforms include those capable of processing on PC local area networks ("LAN's") or on IBM mainframe hardware, and client processes executing in a Windows environment. In 1995, the Company purchased rights to Internet technology known as ViLink Electronic Commerce Platform ("ViLink"), a tool for rapid development of web sites based on insurance data. ViLink has enjoyed broad market acceptance in the life insurance and related financial services industries. The Company's acquisition of The Leverage Group, Inc. ("TLG") in 1998 provided the Company with PolicyLink . PolicyLink is deployable in a LAN and UNIX environment and is browser-enabled. This client-server system supports life insurance and complex variable annuity products. During 1998, the Company shipped PMSCiSolutions, its first interactive Internet-based application for the property and casualty industry. This product extends the processing capabilities of the Company's systems to new audiences such as agents and consumers. Future releases of PMSCiSolutions will provide additional functionality for the Company's administrative applications. Since April 1998, the Company has offered LoanXchange to the financial services industry. LoanXchange is a fully integrated client/server mortgage origination and underwriting platform for both retail and wholesale organizations. During 1999, the Company began offering the LoanXchange.com ("LX.com") as an Internet business-to-business loan origination service. LX.com uses the Internet to connect mortgage brokers to lenders and accelerates the origination process. Claims Outcome Advisor ("COA") is a claims and benefits solution that facilitates the management of long-term disability or other work-related injury claims costs. This solution maps medical and job-related information to create possible return to work scenarios. COA covers workers' compensation claims and bodily injury claims. The Company's acquisition of DORN Technology Group, Inc. ("DORN"), in June 1999, provided the Company with Claims Extended Edition/RISKMASTER , a risk management solution for self-insured organizations. Using Claims Extended Edition, a claims examiner, risk manager, or loss control specialist can perform and document each phase of the claims process electronically. In March 1999, the Company's acquisition of Legalgard Partners, LP ("Legalgard") provided the technical foundation for Litigation/Advisor, a fully functional litigation cost management system. It includes components that assist companies in litigation cost and budget management, bill submission, guideline compliance coding and bill analysis, and analytical and management reporting. PRODUCT SUPPORT AND SERVICES PRODUCT SUPPORT Most customers initially licensing the Company's software systems pay a monthly license fee which entitles the customer to Maintenance, Enhancements and Services Availability ("MESA"). Under the maintenance provisions of MESA, the Company provides telephone support and error correction to current base versions of licensed systems. The enhancement provisions of MESA provide unspecified additions or modifications to the licensed systems, if and when they become generally available as a result of the Company's continuing research and development efforts. Services availability allows customers access to professional services, other than maintenance and enhancements, which are provided under separate arrangements during the MESA term. PROFESSIONAL SERVICES The Company provides, on a time and materials basis, and in some circumstances under fixed-price arrangements, professional consulting and other services including needs analysis, implementation, modification, project management and programming. In addition, the Company provides a full range of training programs to customers using its products and technology. SOURCING The Company offers information technology outsourcing ("ITO") services from its data centers located in North America, Europe and Australia. These services range from providing processing capabilities for highly regulated lines of business to providing complete processing capabilities for all or most of a customer's business. The services range from making available software systems licensed from the Company on a remote basis, to assuming complete systems management, processing and administration support responsibilities for a customer. ITO services are typically provided under contracts having terms from three to ten years. The Company also offers Business Process Outsourcing ("BPO") services, addressing the complete back office processing of insurance transactions from mailroom to policy issuance. By combining advanced technologies with re-engineered workflows, the Company is able to bring an increased level of efficiency to its customers' business processes. Entrusting these processes to the Company allows customers to take advantage of these efficiencies and focus resources on core competencies. BPO services are typically provided under contracts having terms from three to ten years. PRODUCT DEVELOPMENT Historically, the computer software and services industry has experienced rapid technological changes in hardware and software. Additionally, the insurance industry is constantly subject to regulatory changes and new requirements. This combination of changes requires the Company to continuously develop new products and enhancements to existing products to meet the automation needs of the global insurance and related financial services industries. Over the last two decades, within the insurance and related financial services industries, technology has progressed from mainframe computing to client-server and now is rapidly embracing eBusiness utilizing the Internet. Examples of the Company's continuing product development efforts to address these movements in technology are as follows: Although development efforts for S3+ for the property and casualty insurance industry will continue, the majority of the functional components of S3+ have been delivered since research began in 1987. With the completion of Release 8.0a in 1997, Series III offers a comprehensive functional solution to the property and casualty industry worldwide in an IBM OS/2 operating system environment. With the completion of Release 2.0 in 2000, S3+ offers a similarly comprehensive solution on the Windows NT platform. The Company has adopted object-oriented technology for current and future application development. As such, it is the Company's goal that every new development project uses the same technology and architecture to create new insurance objects. S3+ incorporates object-oriented technology and also supports the Microsoft Windows NT operating system. During the 1999 third quarter, the Company determined that future development and enhancements would no longer be directed toward OS/2. The development of CyberLife has represented a significant investment for the Company. Beginning with the existing functionality of the CK/4 Enterprise Solution, this development has involved creating a new architecture and expanded capabilities employing object-oriented development techniques and other leading-edge technologies making it a client/server enterprise-wide system for the life insurance and related financial services industries. CyberLife's underlying technologies include expert systems, relational databases, real-time processing, and multi-platform implementations. The system is designed to be scalable from IBM mainframes to LAN server platforms and is accessible via multiple forms of user interfaces. As part of this development effort and consistent with the Company's desire to reuse its computer code, a number of the Company's other products, including the Client Information System , DecisionXchange system and ViLink Electronic Commerce Platform, have been integrated with CyberLife. This eliminates the need to develop similar functionality within CyberLife. DecisionXchange and ViLink are also being integrated with PolicyLink in the LAN environment. Since April 1998, the Company has offered LoanXchange to the financial services industry. LoanXchange is a fully integrated client/server mortgage origination and underwriting platform for both retail and wholesale organizations. During 1999, the Company integrated functionality from DecisionXchange and ViLink to begin offering an Internet service called the LoanXchange.com. While the Company intends to continue to develop applications for IBM architecture platforms, it also supports open systems. For example, during 1998, the Company entered into an alliance with Microsoft (see "Strategic Alliances" below). This open systems approach, which allows the host-based components to be converted to various platforms, will allow separate software products to be integrated with one another, as well as with the customer's existing and future systems, whether provided by the Company or other vendors. COA is one of the Company's first claims and risk management solutions. This Microsoft-compatible solution combines medical information and occupational skills to produce return-to-work plans. The Company's recently added PMSCiSolutions to its list of Internet-based products. PMSCiSolutions enables insurance companies to participate in eBusiness. It provides real-time Internet processing to agents and consumers. In an effort to maintain and strengthen its competitive position, the Company invests substantial amounts in internal product development. Capitalized internal product development expenditures were $67.1, $59.6 and $62.5 million in 1999, 1998 and 1997, representing 10.4%, 9.8% and 12.1% of total revenues, respectively. Amounts capitalized by business segment: property and casualty, $27.0 million; life and financial solutions, $19.2 million; international, $20.9 million. During 1998 and 1999, the Company recorded significant write-offs and write-downs of previously capitalized software development costs (see "Special Charges" in Management's Discussion and Analysis of Financial Condition and Results of Operations). The Company intends to continue to expand its product and services offerings through internal development and acquisitions. MARKETING AND CUSTOMERS The Company primarily markets its products and services to more than 1,000 property and casualty and life insurance companies, independent insurance agents and adjusters and financial institutions. In addition, the Company offers its software products and automation and administration support services in 37 countries. No single customer accounted for more than 10% of revenues during the year ended December 31, 1999. The Company markets its products and services through a staff of approximately 170 employees, including sales and marketing support personnel, most of who are specialists in the insurance industry and information technology. The Company's marketing force works extensively with each prospective customer to assist in analyzing its specific requirements. Consequently, the sales cycle for a prospective customer seeking a major automation based solution may extend up to 18 months. In addition to its own software products, the Company markets certain third party software and hardware products to its customers. Typically, these software products are designed to perform noninsurance functions or to improve the control and productivity of computer resources. The Company is a reseller of certain standard hardware used to operate various of its software systems. LICENSES AND PRODUCT PROTECTION The Company's revenues are generated principally by licensing standardized insurance software systems and providing outsourcing and professional services to the global insurance and financial services industries. Software systems are licensed under the terms of substantially standard nonexclusive and nontransferable agreements, which generally have a noncancelable minimum term of six years and provide for an initial license charge and a monthly license charge. The initial license charge grants a right to use the software system available at the time the license is signed. The monthly license charge provides the right to use the software and access to MESA during the term of the license agreement (see description above under Product Support and Services). Customers wishing to acquire perpetual rights to use the Company's software enter into additional agreements to acquire such rights. The Company relies upon contract, copyright and other bodies of law to protect its products as trade secrets and confidential proprietary information. The Company's agreements with its customers and prospective customers prohibit disclosure of the Company's trade secrets and proprietary information to third parties without the consent of the Company and generally restrict the use of the Company's products to only the customers' operations. The Company also informs its employees of the proprietary nature of its products and obtains from them an agreement not to disclose trade secrets and proprietary information. Notwithstanding those restrictions, it may be possible for competitors of the Company to obtain unauthorized access to the Company's trade secrets and proprietary information. The Company owns numerous trademarks and service marks which are used in connection with its business in all segments. These trademarks are important to its business. Depending upon the jurisdiction, the Company's trademarks are valid as long as they are in use and/or their registrations are properly maintained and they have not been found to have become generic. Registrations of these trademarks can generally be renewed indefinitely as long as the trademarks are in use. COMPETITION The computer software and services industry is highly competitive. Based upon its knowledge of the industry, the Company believes it is a leading provider of enterprise and electronic commerce application software, professional services, and outsourcing designed to meet the needs of the global insurance and related financial services industries. Very large insurers, that internally develop systems similar to those of the Company may or may not become major customers of the Company for software. There are also a number of independent companies that offer software systems that perform certain, but not all, of the functions performed by the Company's systems. There are a number of larger companies, including computer services, software and outsourcing companies, consulting firms, computer manufacturers, and insurance companies, that have greater financial resources than the Company and possess the technological ability to develop software products similar to those offered by the Company. These companies present a significant competitive challenge to the Company's business. The Company competes on the basis of its service, system functionality, performance, technological advances and price. ACQUISITIONS AND GEOGRAPHIC EXPANSION International customers and marketplaces are essential to the Company maintaining its position as a leading provider of insurance automation solutions and systems and related professional services to the global insurance industry. The Company opened its Canadian office in 1977 and, since that time, has expanded operations to include Europe, Asia, Australia, Africa and Latin America. The Company currently has customers in 37 countries (see Segment Information). Between 1985 and 1994, the Company expanded operations through acquisitions in adjacent markets and internationally. Most significantly, these early acquisitions established the basis for the Company's presence in the life and financial solutions segment and in Europe. In October 1995, the Company increased its European presence by purchasing micado Beteiligungs-und Verwaltungs GmbH ("micado") headquartered in Germany. micado provides services and software to German insurance and financial services companies. In October 1996, the Company acquired certain assets of Co-Cam Pty Ltd., headquartered in Melbourne, Australia, as a means to further strengthen its presence in the Asian and Australian marketplaces. In August 1998, the Company acquired TLG, headquartered in Hartford, Connecticut. TLG owns PolicyLink, 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. This acquisition provides the Company with a LAN and UNIX based solution supporting non-traditional life and financial services products. In December 1998, the Company acquired CAF Systemhaus fur Anwendungsprogrammierung GmbH ("CAF") and related entities. CAF, headquartered in Gilching, Germany, owns Visual Project Modeling Systems ("VP/MS"). VP/MS is designed to allow insurance companies to easily design and implement computer code to administer new insurance products with reduced programming cost and time-to market. In March 1999, the Company purchased Legalgard, a legal cost containment business headquartered in Philadelphia, Pennsylvania. 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 has developed the Counsel Partnership System into the Litigation Advisor System for licensing directly to insurance companies. In June 1999, the Company purchased DORN, a risk and claims management company headquartered in Detroit, Michigan. 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 business and further develop the Riskmaster and Quest systems to complement its suite of claims products. In June 1999, the Company purchased Financial Administrative Services, Inc. ("FAS"), a BPO provider for the life and related financial services industry. Headquartered in Hartford, Connecticut, FAS uses the Company's PolicyLink system to support the rapid introduction of variable insurance products and annuities in a business process outsourcing environment. STRATEGIC ALLIANCES Microsoft. Microsoft and PMSC continue to work together to incorporate Microsoft's key technologies into existing and new application solutions offered by PMSC. Since the alliance between Microsoft and PMSC was announced in 1998, PMSC has delivered to the insurance and related financial services industries several new Microsoft-based products such as COA, Litigation Advisor, and PMSCiSolutions, and released enhancements to existing products, specifically S3+ and Point+ that support Microsoft's technology. Lockheed Martin Corporation. The Company formed a strategic alliance for systems outsourcing with Integrated Business Solutions, a unit of Lockheed Martin Corporation ("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. SEGMENT INFORMATION The Company has classified its operations into five operating segments. The 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 and Canada. 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. 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. The majority of the Company's revenues are generated from products and services provided in the United States, although the Company does have customers in a total of 37 countries. The following table illustrates the relative percentages of total revenue represented by the Company's products and services by geographic region.
Percent of Revenue Year Ended December 31, ----------------------------- 1999 1998 1997 ----- ----- ---- United States . . . 72.8% 70.7% 66.4% Europe. . . . . . . 21.4 21.9 25.2 Asia and Australia. 4.6 5.5 6.3 Other International 1.2 1.9 2.1
Additional information regarding operating segments and geographic areas is contained in Note 13 of Notes to Consolidated Financial Statements. SEASONALITY For discussion of seasonality, see Seasonality and Inflation in Management's Discussion and Analysis of Financial Condition and Results of Operations. EMPLOYEES At March 27, 2000, the Company had 5,749 full-time employees and 5,860 total employees located in offices worldwide. This reflects a reduction in force of 369 employees the Company announced in February 2000. ITEM 2. PROPERTIES The Company owns its 867,000 square foot headquarters complex located on 145 acres in Blythewood, South Carolina. The Company leases space at 32 various locations for its regional and branch offices throughout the United States. Internationally, the Company leases space at 37 locations throughout Canada, Europe, Africa, Asia, Australia and New Zealand. Generally, the international properties support the international segment and the domestic properties support all segments. In July 1998, the Company turned over operation of its Blythewood, South Carolina data center to Lockheed Martin. This data center has 3 mainframe and 6 mid range computers, which have over 8 terabytes of disk storage and are capable of processing over 841 million instructions per second and 2,731 commercial processing workloads, respectively. The Company is currently utilizing 77% of the mainframe capacity and 95% of mid-range capacity. The Company's data center in Bergen, Norway has one mainframe computer, which has over 1.5 terabytes of disk storage and is capable of processing over 265 million instructions per second. The Company is currently utilizing 80% of this capacity. The Company's data center in Melborne, Australia has various UNIX systems which have over 120 gigabytes of disk storage and is capable of processing 90,000 transactions per minute. The Company is currently utilizing 85% of this capacity. The Company's data center in Sydney, Australia has 4 midrange computers with over 150 gigabytes of disk storage and is capable of 190 commercial processing workloads. The Company is currently utilizing 80% of this capacity. The Company uses a private common access network to support its operations. The network is tied together through a backbone located at headquarters in Blythewood, South Carolina, with hubs in Europe and Australia. The backbone accommodates all connectivity requiring access to multiple systems or sites and remote operations including international locations. Remote connectivity to the backbone is accomplished through a Wide Area Network ("WAN") using point to point, frame relay, and dial-up connectivity. Operation and maintenance of the WAN is outsourced to Lockheed Martin. The Internet is accessed through T-1 connections and local ISP's. Security is provided through a series of firewalls. There are over 140 Local Area Networks (LAN's) connected to the backbone and/or WAN. Aggregate network traffic over the average business day is approximately 5 terabytes. Traffic is typically not more than 50% of overall capacity. Network protocols include IPX/SPX, Netbios, TCPIP, SNA, and X.25. Third party operating systems used in production environments attached to the network include Netware, NT Server, OS/2, Linux, and UNIX. There are approximately 630 server systems supported as production devices, and approximately 1.6 terabytes of DASD. ITEM 3. LEGAL PROCEEDINGS The Company is involved in litigation commenced in February 2000, in the District Court of Dallas County, Texas, by Chase Manhattan Mortgage Corporation ("Chase") related to the Company's mortgage loan origination systems and services. The complaint alleges breach of contract, breach of warranty, misrepresentation, malpractice, misrepresentation and mismanagement and seeks a declaratory judgment and damages in excess of $20 million including amounts paid by Chase to the Company, internal costs, consulting fees, opportunity costs, reputational costs, attorneys fees and costs and punitive and exemplary damages. Chase is also seeking an equitable accounting and injunctive relief related to the funds paid under the agreement, preservation of the system, and support of the system. The Company has not yet responded to the Chase complaint, but believes that the allegations are without merit and are subject to various affirmative defenses and counterclaims and will vigorously defend this matter. In January 2000, Computer Sciences Corporation ("CSC") filed a complaint against the Company alleging that the Company and Neuronworks, an entity retained by the Company in the development of COA, misappropriated CSC's trade secrets related to CSC's Colossus product and used such trade secrets in the development of the Company's COA product. The litigation was removed from Texas State court and is currently pending in the United States District Court for the Western District of Texas, Austin Division. CSC's complaint alleges unfair competition, product misappropriation, trade secret theft, tortious interference with existing and prospective contracts, aiding and abetting breach of fiduciary duty, and civil conspiracy. CSC's complaint seeks preliminary and permanent injunctive relief, damages, attorney's fees and punitive damages, all in an unspecified amount. The Company has denied the allegations against it and asserted various affirmative defenses and counterclaims against CSC, including counterclaims for unfair trade practices, false representation, false promotion and commercial disparagement under the Lanham Act, business disparagement, injurious falsehood, defamation, and tortious interference with existing and prospective contractual and business relationships. On March 22, 2000, a hearing was held on CSC's request for preliminary injunctive relief to enjoin the Company from marketing and licensing COA. CSC's request for preliminary injunctive relief was denied. The case has been set for trial in December 2000. The Company believes CSC's remaining claims are without merit and is vigorously defending this matter and pursuing relief on the Company's claims. On January 7, 2000, following a morning news release by the Company that fourth quarter earnings would be below analyst estimates, the Company and three of its officers were named as defendants in an purported class action complaint filed on behalf of purchasers of the Company's stock during the period between October 22, 1998 and January 6, 2000. Since this initial filing, additional purported class actions have been filed, three in the United States District Court for the District of South Carolina and two in the United States District Court for the Southern District of New York (which are in the process of being transferred to South Carolina), purportedly on behalf of purchasers of the Company's stock during the period between October 22, 1998 and February 9 or 10, 2000. These class action lawsuits allege violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 based on, among other things, alleged misleading statements, alleged failure to disclose material adverse information, alleged false financial reporting, alleged failure to report trends, demands or uncertainties, and alleged failure to implement and maintain adequate internal controls. Each of the complaints seeks unspecified compensatory damages, including interest, costs and attorney fees. At a hearing held on March 20, 2000, the court granted plaintiffs' motion to consolidate all six cases, appointed four members of the class as lead plaintiffs and approved their selection of lead counsel, directed that the complaints in all but the first-filed case be dismissed without prejudice, and directed plaintiffs to file an amended consolidated complaint within 45 days. Although the Company has not yet filed formal responses to these lawsuits, the Company believes the claims are without merit and is vigorously pursuing a full defense of these actions and allegations. On March 10, 2000, one of the Company's employees, suing allegedly on behalf of herself and all former or current participants in the Company's 401(k) Retirement Savings Plan ("Plan") during the period October 22, 1998 through February 10, 2000, commenced a purported class action against the Company, its Chairman and three members of the Administrative Committee of the Company's 401(k) Retirement Savings Plan. The action alleges that the Plan's investment in the Company's stock violated Sections 502(a)(2) and (3) of ERISA and constituted a breach of fiduciary duty given defendants' alleged knowledge that the Company's stock price was artificially inflated throughout the class period as a result of the same series of alleged materially false and misleading statements that form the basis of the securities class action described above. Although the Company's time to respond to this complaint has yet to occur, the Company believes the claims are without merit and intends to mount a vigorous defense to the allegations. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position. - ---- --- ----------------------------------- G. Larry Wilson. . . . . . . . . 53 Chairman of the Board, President and Chief Executive Officer David T. Bailey. . . . . . . . . 53 Executive Vice President Stephen G. Morrison. . . . . . . 50 Executive Vice President, Secretary, General Counsel and Chief Administrative Officer Michael W. Risley. . . . . . . . 43 Executive Vice President Timothy V. Williams. . . . . . . 50 Executive Vice President and Chief Financial Officer Michael D. Gantt . . . . . . . . 48 Senior Vice President Harald J. Karlsen. . . . . . . . 53 Senior Vice President
G. Larry Wilson - Chairman of the Board (since 1985), President and Chief Executive Officer of the Company (since 1980) and his current term as Director will expire in 2001. Employed by the Company since its inception. David T. Bailey - Executive Vice President of the Company since 1986. Responsible for the Property and Casualty Group. Employed by the Company since 1981. Stephen G. Morrison - Executive Vice President, Secretary and General Counsel of the Company since January 1994 and Chief Administrative Officer since 1997. Responsible for the administration of the legal affairs of the Company, the Legal and Business Services Group which includes legal, human resources, quality and corporate marketing. Employed by the Company since January 1994. Michael W. Risley - Executive Vice President of the Company since November 1998. Responsible for the Financial Solutions Group. Employed by the Company since 1980. Timothy V. Williams - Executive Vice President and Chief Financial Officer of the Company since February 1994. Responsible for the Financial and Operational Services Group. Employed by the Company since February 1994. Michael D. Gantt - Senior Vice President of the Company since 1998. Responsible for the Claims and Risk Management Group. Employed by the Company since 1995. Harald J. Karlsen - Senior Vice President of the Company since 1998. Responsible for international operations in Europe, Africa and the Middle East. Employed by the Company since 1993. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the New York Stock Exchange, symbol PMS. The Company has never paid or declared a cash dividend on its common stock, nor currently has any intent to do so. The following table sets forth, for the calendar periods indicated, the high and low market prices for the Company's common stock, restated for the stock split that occurred in June 1998 (see Note 11 of Notes to Consolidated Financial Statements).
1999 High Low ------- ------ First Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $54 15/16 $30 1/4 Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 3/4 26 Third Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 26 5/8 Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 11/16 16 3/4 1998 High Low ------------ ---------- First Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40 11/32 $ 32 Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 1/2 36 3/8 Third Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 3/8 36 3/4 Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 3/4 28 13/16
Title of Class Common Stock, $.01 par value The number of record holders of the Company's common stock was 1,188 as of March 27, 2000. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
RESULTS OF OPERATIONS 1999 1998 1997 1996 1995 -------- ---- ---- -------- -------- (In thousands, except per share data) Revenues. . . . . . . . . . . . . . . . . $ 644,019 $607,458 $518,171 $423,310 $365,485 Operating (loss) income . . . . . . . . . (104,272) 87,432 79,193 69,565 16,285 Other (expenses) and income, net. . . . . (10,693) (2,136) (3,583) (2,677) (543) (Loss) income from continuing operations before income taxes . . . . . . . . . . (113,119) 86,355 76,799 66,888 15,742 Discontinued operations, net. . . . . . . - (465) 1,994 3,035 (4,959) Net (loss) income . . . . . . . . . . . . $ (71,971) $ 53,271 $ 50,257 $ 45,997 $ 3,139 Basic (loss) earnings per share . . . . . $ (2.02) $ 1.46 $ 1.38 $ 1.24 $ 0.08 Diluted (loss) earnings per share . . . . $ (2.02) $ 1.36 $ 1.33 $ 1.22 $ 0.08 ========== ========= ========= ========= ========= FINANCIAL CONDITION Cash and equivalents and marketable securities. . . . . . . . . . . . . . . $ 17,833 $ 26,013 $ 35,459 $ 24,355 $ 39,709 Current assets. . . . . . . . . . . . . . 211,999 217,123 185,809 160,342 165,593 Current liabilities . . . . . . . . . . . 75,995 98,935 86,213 112,636 94,461 Working capital . . . . . . . . . . . . . 136,004 118,188 99,596 47,706 71,132 Total assets. . . . . . . . . . . . . . . 706,288 718,698 618,406 581,386 532,736 Long-term debt (excludes current portion) 227,000 85,000 37,714 34,268 14,873 Total liabilities . . . . . . . . . . . . 384,103 285,688 207,910 218,134 150,064 Stockholders' equity. . . . . . . . . . . 321,561 432,484 410,496 363,252 382,672
The above should be read in conjunction with the Consolidated Financial Statements, Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in this Annual Report. Prior year data has been reclassified to conform to current year presentation. The Company considers special charges described below unusual events or unusual transactions related to continuing business activities. The results of operations for 1999 include approximately $153.6 million of pretax special charges. These charges include approximately $118.4 million of non-cash charges related to acceleration of amortization of software, and the write-off of goodwill and other intangibles. The charges paid or to be paid in cash include approximately $12.0 million related to disputes with customers, approximately $12.9 million related to restructuring operations, approximately $9.6 million related to the settlement of litigation, and other similar charges of $0.7 million (see "Special Charges" under Management's Discussion and Analysis). The results of operations in 1998 include $13.3 million of special charges. These pre-tax charges include $3.7 million related to the acquisition of TLG and $9.6 million for the impairment of capitalized software development costs which resulted from certain technology related issues and changes in the Company's strategy (see "Special Charges" under Management's Discussion and Analysis). The results of operations in 1996 include a net special credit of $3.4 million. This credit resulted from a pre-tax gain of $9.4 million related to the recovery of previously incurred litigation costs and a pre-tax charge of $6.0 million related to other litigation. The results of operations in 1995 include special charges of $56.4 million (after taxes $39.9 million, or $2.06 per share). These charges principally related to the restructuring of the Company's data processing facilities and information services business, litigation costs, acquisition-related charges, impairment of certain intangible assets and software associated with acquired businesses and the gain on the sale of the Company's health services business. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Set forth below are certain operating items expressed as a percentage of revenues and the percent increase (decrease) for those items between the periods presented:
Percent Increase (Decrease) ------------------- Percentage of Revenues 1999 1998 Year Ended December 31, vs vs --------------------------- 1999 1998 1997 1998 1997 ------ ------ ---- ------ ------ REVENUES: Licensing . . . . . . . . . . . . . . . . . . 22.0% 22.0% 25.6% 6% 1% Services. . . . . . . . . . . . . . . . . . . 78.0 78.0 74.4 6 23 ------- ------ ------ 100.0 100.0 100.0 6 17 OPERATING EXPENSES: Cost of revenues: Employee compensation and benefits . . . . . 48.0 44.1 41.8 15 24 Computer and communications expenses . . . . 7.9 6.3 6.2 33 19 Depreciation and amortization of property, equipment and capitalized software costs 27.0 11.8 11.2 144 23 Other costs and expenses . . . . . . . . . . 8.6 3.9 5.3 132 (13) Selling, general and administrative expenses. . 18.0 17.1 18.3 11 10 Amortization of goodwill and other intangibles. 3.2 1.8 1.9 94 8 Restructuring and other charges . . . . . . . . 3.5 - - - - Acquisition related charges . . . . . . . . . . - 0.6 - - - ------- ------ ------ 116.2 85.6 84.7 44 19 OPERATING (LOSS) INCOME . . . . . . . . . . . . (16.2) 14.4 15.3 (219) 10 Equity in earnings of unconsolidated affiliates 0.3 0.2 0.2 64 (2) Minority interest . . . . . . . . . . . . . . . - - - (40) - OTHER INCOME AND EXPENSES, NET. . . . . . . . . (1.7) (0.4) (0.7) 401 (40) ------- ------ ------ (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES . . . . . . . . . . . . . (17.6) 14.2 14.8 (231) 12 Income tax (benefit) expense. . . . . . . . . . (6.4) 5.4 5.5 (226) 14 ------- ------ ------ (LOSS) INCOME FROM CONTINUING OPERATIONS. . . . (11.2) 8.8 9.3 (234) 11 Discontinued operations, net. . . . . . . . . . - (0.1) 0.4 (100) (123) ------- ------ ------ NET (LOSS) INCOME . . . . . . . . . . . . . . . (11.2)% 8.7% 9.7% (235)% 6% ======= ====== ======
REVENUES - --------- The Company's revenues are generated principally by licensing standardized insurance software systems and providing outsourcing and professional services to the global insurance and related financial services industries. Licensing revenues are provided for under the terms of nonexclusive and nontransferable agreements, which generally have a noncancelable minimum term of six years and provide for an initial license charge and a monthly license charge. Customers wishing to acquire perpetual rights to use the Company's software enter into additional agreements to acquire such rights.
LICENSING 1999 Change 1998 Change 1997 ------- ------ ------- ------- ------- (Dollars in millions) Initial charges. . . . $ 72.2 7% 67.7 (3)% $ 69.8 Monthly charges. . . . 69.7 6 66.1 5 62.9 ------- ------- ------ $141.9 6% $133.8 1 % $132.7 ======= ======= ====== Percentage of revenues 22.0% 22.0% 25.6%
Initial licensing - ------------------ - Initial license revenues for 1999 increased $4.5 million compared to 1998 with the following increases (decreases) by business segment: property and casualty up 81% ($16.8 million) primarily from $16.0 million on new Claims products and $3.0 million in PMSCiSolutions licensing; life and financial solutions down 43% ($11.7 million) primarily due to a decline in Banking Division licensing activity by comparison to 1998; and international down 3% ($0.6 million) primarily due to declining activity in Asia and Australia. Initial license revenues for 1998 decreased $2.1 million compared to 1997 with the following increases or decreases by business segment: property and casualty down 13% ($3.1 million) due to a decline in S3+ license activity; life and financial solutions up 37% ($7.3 million) on strong Banking Division licensing activity; and international down 24% ($6.3 million) due to lower licensing activity in Central Europe combined with decreasing foreign currency values. Initial license charges include right-to-use licenses of $16.3, $15.5 and $10.2 million for 1999, 1998 and 1997, respectively. 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. Initial license charges also include contract termination fees of $1.0, $4.9 and $0.2 million for 1999, 1998, and 1997, respectively. Additionally, 1999 initial license charges include $2.5 and $4.1 million from the licensing of the recently acquired Legalgard and DORN products, respectively. Initial license revenues in 1999 also include $2.9 million for a COA license to the former owners of Legalgard, and $2.0 million for a license of several of the Company's life and financial solutions products to the former owners of FAS. Initial license revenues also include $3.3 million from the sale of hardware remarketed by the Company in conjunction with licenses of its software. In 1998, initial license charges include $4.9 million from licensing of acquired TLG products and $2.2 million of license agreements with the purchaser of the discontinued life information services segment. In 1997, initial license charges include $1.8 million of initial license agreements with the purchaser of the discontinued property and casualty information services segment. Because a significant portion of initial licensing revenues is recorded at the time new systems are licensed, there can be significant fluctuations in revenue from period to period. Set forth below is a comparison of initial license revenues by segment for 1999, 1998 and 1997:
1999 Change 1998 Change 1997 ------- ------ ------- ------- ------- (Dollars in millions) Property and casualty. . . . $37.6 81 % $20.8 (13)% $23.9 Life and financial solutions 15.5 (43) 27.2 37 19.9 International. . . . . . . . 19.1 (3) 19.7 (24) 26.0 ------ ------ ----- $72.2 7 % $67.7 (3)% $69.8 ====== ====== ===== Percentage of total revenues 11.2% 11.1% 13.5%
Monthly licensing - ----------------- Monthly license charges for 1999 increased $3.6 million compared to 1998, with the following increases (decreases) by business segment: property and casualty down 14% ($4.9 million) due to weak 1998 initial licensing and the effect of right-to-use licenses; life and financial solutions up 37% ($5.4 million) on strong 1998 initial license activity; and international up 19% ($3.1 million) principally due to increased initial license activity in the United Kingdom and the Asia/Pacific region during 1998. Monthly license charges for 1998 increased $3.2 million compared to 1997. The life and financial solutions segment's monthly license charges increased 25% ($2.9 million) due to strong initial licensing activity of life and financial solutions products during 1997. The property and casualty and international segments' monthly license charges remained relatively unchanged.
1999 Change 1998 Change 1997 ------- ------ ------- ------- ------- (Dollars in millions) Property and casualty. . . . $30.1 (14)% $35.0 (1)% $35.1 Life and financial solutions 20.0 37 14.6 25 11.7 International. . . . . . . . 19.6 19 16.5 3 16.1 ------ ------ ----- $69.7 6% $66.1 5% $62.9 ====== ====== ===== Percentage of total revenues 10.8% 10.9% 12.1%
SERVICES The Company's services revenue consists primarily of Professional Services & ITO and BPO. Services revenue is derived from professional support services, which include implementation and integration assistance, consulting and education services and outsourcing services.
Services 1999 Change 1998 Change 1997 -------- ------- ------ ------- ------- ------- (Dollars in millions) Professional Services & ITO $413.3 (2)% $419.9 27% $331.1 BPO . . . . . . . . . . . . 85.3 74 48.9 5 46.8 Other . . . . . . . . . . . 3.5 (27) 4.8 (37) 7.6 ------- ------- ------ $502.1 6 % $473.6 23% $385.5 ======= ======= ====== Percentage of revenues. . . 78.0% 78.0% 74.4%
Professional Services & ITO - ------------------------------ Professional Services & ITO revenues for 1999 decreased $6.6 million compared to 1998, with the following increases (decreases) by business segment: property and casualty down 11% ($20.8 million) primarily due to the winding down of Year 2000 preparations and a decrease in initial license activity in 1998; life and financial solutions up 20% ($18.9 million) primarily due to the acquisition of TLG in the third quarter of 1998 ($14.3million) and higher 1998 initial license activity; and international down 3% ($4.7 million) on weak 1998 initial licensing activity. Professional Services & ITO revenues for 1998 increased $88.8 million compared to 1997, with the following increases by business segment: property and casualty up 30% ($42.2 million); life and financial solutions up 51% ($32.3 million); and international up 11% ($14.3 million). The increases are principally due to increases in implementation services and in the processing volumes of services provided to new and existing customers.
1999 Change 1998 Change 1997 ------- ------ ------- ------- ------- (Dollars in millions) Property and casualty. . . . $163.6 (11)% $184.4 30% $142.2 Life and financial solutions 115.2 20 96.3 51 64.0 International. . . . . . . . 134.5 (3) 139.2 11 124.9 ------- ------- ------ $413.3 (2)% $419.9 27% $331.1 ======= ======= ====== Percentage of total revenues 64.2% 69.1% 63.9%
BPO - --- BPO revenue for 1999 increased $36.4 million compared to 1998, with the following increases by business segment: property and casualty up 23% ($8.5 million) with declines in governmental business more than off-set by growth in commercial markets; life and financial solutions up 215% ($26.5 million) primarily due to the acquisition of FAS ($10.7 million) and internal growth; and international with $1.4 million. BPO revenue for 1998 increased $2.1 million compared to 1997, with the following increases (decreases) by business segment: property and casualty down 8% ($3.0 million) primarily due to a loss of governmental business and life and financial solutions up 71% ($5.1 million) principally due to an increased presence in the traditional BPO market.
1999 Change 1998 Change 1997 ------- ------ ------- ------- ------- (Dollars in millions) Property and casualty. . . . $45.1 23% $36.6 (8)% $39.6 Life and financial solutions 38.8 215 12.3 71 7.2 International. . . . . . . . 1.4 - - - - ------ ------ ----- $85.3 74% $48.9 5% $46.8 ====== ====== ===== Percentage of total revenues 13.2% 8.0% 9.0%
OPERATING EXPENSES - ------------------- COST OF REVENUES Employee compensation and benefits: - ------------------------------------- Employee compensation and benefits for 1999 increased 15% compared to 1998. The Company's acquisitions in 1999 and late 1998 (see Note 2 of Notes to Consolidated Financial Statements) accounted for approximately one half ($19.2 million) of the increase with the remainder attributable principally to higher salaries and related costs associated with the growth in professional services and BPO staffing. These increases are 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, 1999 employee compensation and benefits would have increased 16% by comparison to 1998. Compensation and benefits increased 7% ($5.8 million) internationally and 19% ($35.6 million) domestically. Employee compensation and benefits for 1998 increased 24% compared to 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, 1998 employee compensation and benefits would have increased 25% by comparison to 1997. Compensation and benefits increased 23% ($14.2 million) internationally and 24% ($37.0 million) domestically. Computer and communication expenses: - -------------------------------------- Computer and communications expenses for 1999 increased 33% compared to 1998, due primarily to the data center outsourcing agreement with Lockheed Martin that the Company entered into at the beginning of the third quarter of 1998 and increased data center operating software license fees. As a result of the data center outsourcing agreement, certain costs previously included in employee compensation and benefits are now included in computer and communications expense. Had these employee costs not been transferred, 1999 computer and communications expenses would have increased 4% by comparison to 1998. Computer and communications expenses for 1998 increased 19% compared to 1997 principally due to the data center outsourcing agreement with Lockheed Martin. Had the related employee costs not been transferred, 1998 computer and communications expenses would have increased 8% by comparison to 1997. Cost savings from the data center outsourcing agreement were offset by increased communications volumes, increased network and PC related expenses and increased license fees for operational data center software. The following chart reflects Employee compensation and benefits and Computer and communication costs during 1999, 1998 and 1997 without the effect of moving certain salary costs related to the Lockheed Martin outsourcing contract.
1999 Change 1998 Change 1997 -------- ------ -------- ------- --------- (Dollars in millions) Employee compensation and benefits $316.1 16% $271.8 25% $216.8 Computer and communication expense $ 44.0 27 $ 34.7 8 $ 32.3
Depreciation and amortization of property, equipment and capitalized software - -------------------------------------------------------------------------------- costs: - ----- Depreciation and amortization of property, equipment and capitalized software costs for 1999 increased 144% compared to 1998 principally due to the write-off or write-down of certain software described below under "Special Charges and Accounting Changes." Excluding these charges, depreciation and amortization decreased 1% due primarily to the benefit of the special charges largely offset by increased software amortization related to product releases during the last twelve months and increased depreciation of property and equipment primarily related to new headquarters facilities in Blythewood and the United Kingdom. These increases were partially offset by lower software amortization as a result of software write-offs and write-downs. As a percentage of revenue, depreciation and amortization expense, excluding special charges, remained the same at 10% of revenues in both 1999 and 1998. Depreciation and amortization of property, equipment and capitalized software costs for 1998 increased 23% compared to 1997 principally due to impairment charges of capitalized software development costs described below under "Special Charges and Accounting Changes." Excluding these charges, depreciation and amortization increased 7% principally due to higher amortization expense resulting from various releases of the Company's internally developed software products. As a percentage of revenue, depreciation and amortization expense before special charges remained relatively unchanged from 1998 to 1997. Other costs and expenses: - --------------------------- Other costs and expenses for 1999 increased 132% compared with 1998. The acquisitions in 1999 and late 1998 (see Note 2 of Notes to Consolidated Financial Statements) contributed to an $11.3 million increase in other costs and expenses. The remainder is primarily attributable to decreased capitalization of software development costs and rent on new facilities. The Company reserved for uncollectible accounts of $12.4 million associated with its life and financial solutions business, primarily related to $8.3 million of accounts receivable from the Banking Division, and one property and casualty customer (see Note 3 to Consolidated Financial Statements). Other costs and expenses for 1998 decreased 13% compared to 1997 principally due to lower consultant, contract loss and bad debt expense, partially offset by increased facility costs and decreased amounts of capitalized software development costs. Selling, General and Administrative: - -------------------------------------- Selling, general and administrative expenses for 1999 increased 11% compared to 1998. As a percentage of revenue, these expenses increased to 18% from 17% in 1998. Selling, general and administrative expenses for 1998 increased 10% compared to 1997. As a percentage of revenue, these expenses declined to 17% from 18% in 1997. Amortization of Goodwill and Other Intangibles: - --------------------------------------------------- Amortization of goodwill and other intangibles for 1999 increased 94% compared to 1998, principally due to the impairment charges recorded in the third quarter that are described below under "Special Charges and Accounting Changes." Amortization related to the acquisition of TLG in 1998 and Legalgard, DORN and FAS in 1999 also contributed to the increase. Amortization of goodwill and other intangibles for 1998 increased 8% compared to 1997, principally due to the amortization of costs associated with the acquisition of TLG and the Lockheed Martin outsourcing arrangement. Special Charges and Accounting Changes: - ------------------------------------------ For the purposes of this analysis, the Company considers special charges to be unusual events or unusual transactions related to continuing business activities. 1999 Fourth Quarter In the fourth quarter of 1999, the Company recorded special charges of approximately $26.6 million primarily related to its Banking Division. During this quarter and continuing into the first quarter of 2000, rising interest rates caused significant declines in mortgage loan originations and reduced profits for mortgage loan originators. Many existing and prospective customers of the Company's Banking Division to reevaluate their loan origination system projects and requirements. Consequently, the Company established reserves of approximately $8.3 million for accounts receivable and accrued revenue as a result of disputes with several significant Banking Division customers. The Company is in continuing dialogue with these customers and is in various stages of negotiations or resolution concerning these disputes. Furthermore, given the Company's estimate that interest rates will not decrease in the near term, the forecast of new licenses of the LoanXchange product was revised resulting in a $16.3 million write-off of Banking Division software. In addition, in the 1999 fourth quarter, the Company decreased the carrying value of several smaller software products by approximately $1.8 million (see Note 6 to the consolidated financial statements relative to these last two items). On December 3, 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"). The Company identified approximately $3.2 million of revenue recognized previously in 1999 requiring adjustment due to SAB 101 (see "New Accounting Standards and Guidance," below). As a result of 1999 fourth quarter changes in estimates related to two long-term services agreements accounted for under the percentage of completion method of accounting, the Company recorded a cumulative catch-up adjustment in the fourth quarter of 1999 of $8.4 million. The adjustment has been recorded as a reduction in Services revenues. Additionally, during the 1999 fourth quarter, the Company recorded restructuring charges of approximately $0.3 million related to payments to approximately 19 staff involuntarily terminated primarily in the property and casualty segment. 1999 Third Quarter During 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 including among other things 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 that assessment, the 1999 third quarter results include approximately $100.4 million of non-cash charges taken in the third quarter related to the write-off or write-down of software and acquisition intangibles. Approximately $94.3 million of that amount is included in Depreciation and amortization of property, equipment and capitalized software costs (see Note 6 to the consolidated financial statements), and approximately $6.1 million is included in Amortization of goodwill and other intangibles (see Note 5 to the consolidated financial statements). Additionally, the 1999 third quarter results include restructuring and other charges of approximately $12.6 million. These charges, paid or to be paid in cash, result from initiatives taken by the Company in 1999 to eliminate costs through worldwide reductions in force and space requirements. Approximately $7.3 million represents amounts payable to approximately 83 staff who were involuntarily terminated. Approximately $5.3 million 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. 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. 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 cash charge of approximately $9.6 million. 1998 The results of operations in 1998 include $13.3 million of special charges. These pre-tax charges include $3.7 million related to the acquisition of TLG and $9.6 million for the impairment of capitalized software development costs which resulted from certain technology related issues and changes in the Company's strategy (see Note 6 of Notes to Consolidated Financial Statements). Operating Income (Loss): - ------------------------- 1999 produced an operating loss of $104.3 million compared with the 1998 operating income of $87.4 million. The 1999 operating loss results 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 and Accounting Changes." Before these charges, operating income for 1999 decreased 38% compared with 1998. Also before these charges, decreases in segment operating income were: property and casualty decreased 17%, life and financial solutions decreased 19% and international decreased 64% (see discussion of "Revenues" and "Operating Expenses" above). 1998 operating income increased 10% compared to 1997. Increases in segment operating income were: property and casualty - 5%, life and financial solutions - - 74% and international - 15%. The increase in 1998 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. Excluding special charges and credits, operating income for 1998 was $100.8 million compared to $79.2 million for 1997. Operating income, as a percentage of total revenues, excluding the effects of the special charges described above, was 10% for 1999, 17% for 1998 and 15% for 1997. 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 has lead the Company to consider new business models that place less emphasis on initial license revenue in favor of recurring 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. The speed of this transition will be dependent upon the impact on revenues and the resulting impact on the Company's cash flows and debt levels. A significant portion of both the Company's revenues and its operating income is derived from initial licensing agreements received as part of the Company's software licensing activities. Because a substantial portion of these revenues are recorded at the time systems are licensed, there can be significant fluctuations from quarter-to-quarter and year-to-year 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. Set forth below is a comparison of initial license revenues by quarter expressed as a percentage of annual initial license revenues and total revenues for each of the years presented:
First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ------ (Dollars in Millions) 1999 initial license revenues. . . . $ 17.6 $26.7 $19.2 $ 8.7 $ 72.2 % of annual initial license revenues 27.3% 41.5% 26.6% 12.0% 100.0% % of total revenues. . . . . . . . . 11.0% 15.4% 11.4% 6.1% 11.2% 1998 initial license revenues. . . . $ 12.6 $13.0 $14.7 $27.4 $ 67.7 % of annual initial license revenues 18.6 % 19.2% 21.7% 40.5% 100.0% % of total revenues. . . . . . . . . 9.0% 9.0% 9.7% 16.0% 11.1% 1997 initial license revenues. . . . $ 11.3 $16.6 $16.9 $25.0 $ 69.8 % of annual initial license revenues 16.2% 23.8% 24.2% 35.8% 100.0% % of total revenues. . . . . . . . . 9.8% 13.4% 12.8% 17.0% 13.5%
Other Income and Expenses: - ---------------------------- Investment income decreased in 1999 due to lower investable funds compared to 1998. Interest expense increased 224% for 1999 compared to 1998, principally due to higher levels of borrowed funds under the Company's credit agreements. Investment income for 1998 was relatively unchanged compared to 1997. Interest expense decreased 28% for 1998 compared to 1997, principally due to lower levels of borrowed funds under the Company's credit agreements and the capitalization of interest on construction in progress. Income Taxes: - ------------- --- The effective income tax rate (income taxes expressed as a percentage of pre-tax income or loss) on continuing operations including special charges and accounting changes was 36.4%, 39.7% and 37.4% for the years ended December 31, 1999, 1998, and 1997, respectively. The effective income tax rate on continuing operations before special charges and accounting changes was 37.2%, 37.8%, and 37.2% for the years ended December 31, 1999, 1998, and 1997, respectively. Discontinued Operations, Net: - ------------------------------ There were no discontinued operations for 1999. Loss from discontinued operations increased in 1998 compared to 1997, principally due to (i) an additional loss of $1.0 million, net of tax, recognized during 1998 related to the write down of capitalized software and receivables of the property and casualty information services segment; (ii) partial year operating results in 1998 compared to full year operating results in 1997 for the life information services segment; and (iii) no operating results in 1998 compared to eight months operating results in 1997 for the property and casualty information services segment. For additional information on the discontinued operations, see Note 12 of Notes to Consolidated Financial Statements. NEW ACCOUNTING STANDARDS AND GUIDANCE 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, 1999 and 1998. On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"), which among other guidance, clarifies certain conditions to be met in order to recognize revenue. The Company has identified approximately $3.2 million of revenue recognized previously in 1999 requiring adjustment due to SAB 101. These adjustments arose from fees of $3.0 million received on two joint marketing arrangements, and the existence of acceptance terms in a single DORN license agreement totaling $0.2 million. In addition, $1.0 million of DORN license revenue was deferred from the 1999 fourth quarter. As required by SAB 101, the Company has treated these adjustments as a change in accounting principle in accordance with Accounting Principles Board Opinion No. 20, Accounting Changes, and therefore has deferred this revenue in 1999.
LIQUIDITY AND CAPITAL RESOURCES December 31, 1999 1998 -------- ----------- (In Millions) Cash and equivalents and marketable securities. . . .. . . . . . $ 17.8 $ 26.0 Current assets. . . . . . . . . . . . . . . . . . . .. . . . . . 212.0 217.1 Current liabilities . . . . . . . . . . . . . . . . . . . . . . 76.0 98.9 Working capital . . . . . . . . . . . . . . . . . . . . . . . . 136.0 118.2 Current portion of long-term debt . . . . . . . . . . . . . . . 4.0 15.8 Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . 227.0 85.0 Cash provided by operations . . . . . . . . . . . . . . . . . . $ 80.0 $ 99.8 Cash (used) by investing activities . . . . . . . . . . . . . . (180.6) (138.2) Cash provided by financing activities . . . . . . . . . . . . . 92.3 32.2
The Company's total debt, net of cash and marketable securities, at December 31, 1999 was $213 million, a significant increase over the comparable amount ($75 million) at December 31, 1998. Historically, the Company has used cash from operations for the development and acquisition of new products, capital expenditures, acquisition of businesses and repurchases of the Company's stock. However, during 1999, the Company principally used its debt capacity to fund several strategic business acquisitions and investments aggregating $73 million and, to a lesser degree, repurchase its outstanding common stock ($33 million). Additionally, during 1999 the Company also invested $103 million in capitalized internal software development and property and equipment. As of December 31, 1999, the Company had the following credit facilities: a $200 million line of credit expiring in 2002 that had $155 million outstanding; a $70 million term loan that matures on July 15, 2000; and a $5 million uncommitted line of credit that had $4 million outstanding. Because of the large net loss in the fourth quarter, the Company was in violation of one of the financial covenants of both the line of credit and the term loan. Amendments of the related agreements were executed in February and March 2000 that return the Company to compliance with these covenants. Additionally, the amendments include an extension of the term loan maturity to January 31, 2001 and, among other things, an increase in the interest rate payable on the term loan and line of credit, a security agreement covering the Company's assets and a restriction on the Company's ability to make acquisitions and certain similar investments and repurchases of the Company's common stock. Total funds available under the line of credit will be reduced to $180 million until April 1, 2001 at which time it will decrease to $125 million; the maturity has also been shortened to July 2001. Future credit availability under the Company's amended loan agreements is dependent upon the Company achieving improvements in its operating performance. In light of the uncertainties surrounding future performance and the Company's current debt position, the Company has concluded that it must restructure its capital base in order to reduce debt and take advantage of various growth opportunities. Accordingly, the Board of Directors has authorized the Company's management to explore various alternatives to achieve efficiencies and obtain equity or other financing. Significant expenditures planned for 2000, excluding new product development are as follows: acquisition of data processing and communications equipment, support software, buildings, building improvements and office furniture, fixtures and equipment and costs related to the continued enhancement of existing software products. 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 services 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 significant 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. 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. 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, 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. 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. Amounts affected by these estimates include, but are not limited to, the estimated useful lives, related amortization expense and carrying values of the Company's intangible assets and the net realizable value of capitalized software development costs and accrued reserves established for contingencies such as litigation and restructuring activities. Changes in the status of certain matters or facts or circumstances underlying these estimates could result in material changes to these estimates, and actual results could differ from these estimates. A significant portion of both the Company's revenues and its operating income is derived from initial licensing agreements received as part of the Company's software licensing activities. Because a substantial portion of these revenues are recorded at the time systems are licensed, there can be significant fluctuations from quarter-to-quarter and year-to-year 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 Year 2000 has caused an unprecedented level of investment in systems and remediation services that may adversely affect customers' decision to invest in new application software. In addition, the Company believes that system evaluations and decision processes are being affected by uncertainties related to the Internet and its emergence as a viable insurance distribution channel is causing a re-evaluation of the traditional methods of distribution for insurance products. The Company also believes that in order for insurance companies to capitalize on this new distribution method they will be required to redesign their business models and related support systems. The issues raised by the emergence of the Internet and related technology requirements will be distracting and confusing for many insurance companies and complicate the process of transitioning the insurance industry to modern architecture. Therefore, customer uncertainty as to their Internet and enterprise business strategies may extend sales cycles for large enterprise systems. The above factors limit the Company's ability to accurately predict licensing and services demand. 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 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 or had experienced Year 2000 failures of their products, or if customers experience or had experienced system failures as a result of their modifications, the Company could become involved in disputes or litigation related to the cause of such system failures. To date, the Company has not experienced any note worthy system or application failures during the Year 2000 transition periods. Although some incidents were identified, a large percentage of the issues related to date and time stamps that contained erroneous values in the year field presented on reports or on-line screens. Of the few remaining issues not fitting this description, resolutions were either implemented in an expedient and efficient manner or procedures designed to mitigate customer impacts were adopted. YEAR 2000 COSTS Since 1993, the Company estimates that it has incurred approximately $22 million in costs to address Year 2000 remediation issues. Based on the Company's experience, it is not anticipated that additional expenses to address Year 2000 concerns will be incurred. These Company costs were funded by operations. EURO CONVERSION On January 1, 1999, certain member countries of the European Union established fixed conversion rates between their existing sovereign currencies and the euro and 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. During the January 1, 1999 to December 31, 2001 transition period 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 needs of each licensee of the Company's products domiciled or doing business in the participating countries may vary with regards to converting to the euro depending on how and when they choose to convert. The Company has developed strategies to modify its products licensed in the participating countries to convert to the euro. These modifications may be made available to licensees for a fee. Implementation of the modifications is the responsibility of each licensee. The Company's 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. SEASONALITY AND INFLATION The Company's operations have not proven to be significantly seasonal, though as with many companies in the software business, the fourth quarter historically tends to be the strongest quarter annually. Quarterly revenues and net income can be expected to vary at times. This is attributable principally to the timing of customers entering into license agreements with the Company. The Company is unable to control the timing of these decisions. 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. To the extent permitted by the marketplace for the Company's products and services, the Company attempts to recover increases in costs by periodically increasing prices. Additionally, most of the Company's license agreements and long-term services agreements provide for annual increases in charges. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of December 31, 1999, the Company held one foreign currency forward contract with a notational value of $1.9 million as a cash flow hedge that the Company settled in January 2000 for $1.9 million. Apart from this exchange contract, the Company held no derivatives or similar financial instruments bearing market risk related to interest rates, foreign currency, equities or commodities. From time-to-time, the Company enters into forward foreign currency exchange contracts to hedge specific anticipated transactions in currencies other than the US dollar. Approximately 21% of the Company's assets are invested in currencies other than the US dollar. There are no material financial assets held in currencies outside of the functional currencies of these subsidiaries. The Company has variable rate debt explained in Note 7 of Notes to Consolidated Financial Statements. ____________________________________________________ SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Statements in this annual report that are not descriptions of historical facts may be forward-looking statements that are subject to risks and uncertainties, including economic, competitive and technological factors affecting the Company's operations, markets, products, services and prices, as well as other specific factors discussed in Note 14 of Notes to Consolidated Financial Statements and elsewhere herein 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Supplementary Data Page REPORT OF INDEPENDENT ACCOUNTANTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . 28 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES: Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997.. . . . . . . . . . . 29 Consolidated Balance Sheets as of December 31, 1999 and 1998. . . . . . . . . . . . . . . .. . . . . . . . . . . 30 Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income for the years ended December 31, 1999, 1998 and 1997 . . . . . . . . . . . . . . . . .. . . . . . . . . . . 31 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997. . . . . . . . . . . 32 Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 SUPPLEMENTAL SCHEDULES: Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Supplemental schedules other than those listed above are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or in the notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Policy Management Systems Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, cash flows and changes in stockholders' equity and comprehensive income present fairly, in all material respects, the financial position of Policy Management Systems Corporation and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Atlanta, Georgia March 30, 2000
POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, ----------------------------------- 1999 1998 1997 --------- --------- -------- (In thousands, except per share data) REVENUES: Licensing. . . . . . . . . . . . . . . . . . . . . . . . $ 141,939 $133,814 $132,705 Services . . . . . . . . . . . . . . . . . . . . . . . . 502,080 473,644 385,466 ---------- --------- --------- 644,019 607,458 518,171 ---------- --------- --------- OPERATING EXPENSES: Cost of revenues: Employee compensation and benefits . . . . . . . . . . 309,089 268,096 216,779 Computer and communications expenses . . . . . . . . . 51,021 38,451 32,333 Depreciation and amortization of property, equipment and capitalized software costs . . . . . . 174,146 71,376 57,959 Other costs and expenses . . . . . . . . . . . . . . . 55,375 23,897 27,459 Selling, general and administrative expenses . . . . . . 115,714 103,909 94,649 Amortization of goodwill and other intangibles . . . . . 20,468 10,565 9,799 Restructuring and other charges. . . . . . . . . . . . . 22,478 - - Acquisition related charges. . . . . . . . . . . . . . . - 3,732 - ---------- --------- --------- 748,291 520,026 438,978 ---------- --------- --------- OPERATING (LOSS) INCOME. . . . . . . . . . . . . . . . . . (104,272) 87,432 79,193 Equity in earnings of unconsolidated affiliates. . . . . . 1,908 1,163 1,189 Minority interest. . . . . . . . . . . . . . . . . . . . . (62) (104) - OTHER INCOME AND EXPENSES: Investment income. . . . . . . . . . . . . . . . . . . . 1,313 1,569 1,527 Interest expense and other charges . . . . . . . . . . . (12,006) (3,705) (5,110) ---------- --------- --------- (10,693) (2,136) (3,583) ---------- --------- --------- (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . . . (113,119) 86,355 76,799 Income tax (benefit) expense . . . . . . . . . . . . . . . (41,148) 32,619 28,536 ---------- --------- --------- (LOSS) INCOME FROM CONTINUING OPERATIONS . . . . . . . . . (71,971) 53,736 48,263 DISCONTINUED OPERATIONS: Income from operations of discontinued operations less applicable income taxes of $252 and $1,535, respectively . . . . . . . . . . . - 389 2,058 Loss on disposal of discontinued operations, less applicable income taxes (benefit) of $2,272 and ($38), respectively. . . . . . . . . . . . . . . . . . . . . - (854) (64) ---------- --------- --------- - (465) 1,994 ---------- --------- --------- NET (LOSS) INCOME. . . . . . . . . . . . . . . . . . . . . $ (71,971) $ 53,271 $ 50,257 ========== ========= ========= BASIC EARNINGS PER SHARE: (Loss ) income from continuing operations. . . . . . . . $ (2.02) $ 1.47 $ 1.32 (Loss) income from discontinued operations . . . . . . . - $ (0.01) 0.06 ---------- --------- --------- $ (2.02) $ 1.46 $ 1.38 ========== ========= ========= DILUTED EARNINGS PER SHARE: (Loss) income from continuing operations . . . . . . . . $ (2.02) $ 1.37 $ 1.28 (Loss) income from discontinued operations . . . . . . . - (0.01) 0.05 ---------- --------- --------- $ (2.02) $ 1.36 $ 1.33 ========== ========= ========= WEIGHTED AVERAGE COMMON SHARES . . . . . . . . . . . . . . 35,549 36,441 36,468 ========== ========= ========= WEIGHTED AVERAGE COMMON SHARES ASSUMING DILUTION . . . . . 35,549 39,289 37,666 ========== ========= ========= See accompanying notes.
POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED BALANCE SHEETS December 31, ------------------- 1999 1998 ------- ------ (In thousands, except share data) ASSETS Current assets: Cash and equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,744 $ 26,013 Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 - Receivables, net of allowance for uncollectible amounts of $13,000 ($2,051 at 1998) 99,669 123,427 Accrued revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,393 26,557 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,979 9,336 Income tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,728 - Other receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,788 11,279 Prepaids. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,050 8,645 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,559 11,866 --------- --------- Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211,999 217,123 Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142,867 135,538 Accrued revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,130 7,844 Income tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,041 4,041 Goodwill and other intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . 111,024 81,401 Capitalized software costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 155,896 220,908 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,850 24,787 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,332 9,661 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,149 17,395 --------- --------- Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $706,288 $718,698 ========= ========= LIABILITIES Current liabilities: Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . $ 41,236 $ 57,129 Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 15,812 Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,616 9,202 Unearned revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,290 15,804 Accrued restructuring and other charges . . . . . . . . . . . . . . . . . . . . . . 3,630 806 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,223 182 --------- --------- Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,995 98,935 Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227,000 85,000 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,514 98,233 Accrued restructuring and other charges . . . . . . . . . . . . . . . . . . . . . . . 2,659 767 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,935 2,753 --------- --------- Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 384,103 285,688 --------- --------- Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 624 526 Commitments and contingencies (Note 8) STOCKHOLDERS' EQUITY Special stock, $.01 par value, 5,000,000 shares authorized. . . . . . . . . . . . . . - - Common stock, $.01 par value, 75,000,000 shares authorized, 35,585,078 shares issued and outstanding (36,357,139 at 1998) . . . . . . . . . . . 356 364 Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,695 82,396 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287,483 359,454 Accumulated other comprehensive income. . . . . . . . . . . . . . . . . . . . . . . . (12,972) (9,730) Stock employee compensation trust . . . . . . . . . . . . . . . . . . . . . . . . . . (10,001) - --------- --------- Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 321,561 432,484 --------- --------- Total liabilities and stockholders' equity. . . . . . . . . . . . . . . . . $706,288 $718,698 ========= ========= See accompanying notes.
POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME Accumulated Additional Other Common Paid-In Retained Comprehensive Unearned Stock Capital Earnings Income Compensation Total ------- ------------- ---------- ------------ ------------ ---------- (Dollars in thousands) BALANCE, DECEMBER 31, 1996 $ 182 $106,104 $256,110 $ 856 - $363,252 Comprehensive income Net income . . . . . . . . . . . - - 50,257 - - 50,257 Other comprehensive income, net of tax Foreign currency translation adjustments. . . - - - (9,020) - (9,020) Unrealized gain on marketable securities. . . . - - - 20 - 20 --------- Total comprehensive income . . . . 41,257 --------- Stock options exercised (240,018 shares) . . . . . . . . 3 11,018 - - - 11,021 Repurchase of 79,900 shares of common stock. . . . . . . . . ( 2) (5,032) - - - (5,034) --------- ----------------------- --------- --------- --------- --------- BALANCE, DECEMBER 31, 1997 . . . . 183 112,090 306,367 (8,144) - 410,496 Comprehensive income Net income . . . . . . . . . . . - - 53,271 - - 53,271 Other comprehensive income, net of tax Foreign currency translation adjustments. . . - - - (1,578) - (1,578) Unrealized gain on marketable securities. . . . - - - (8) - (8) --------- Total comprehensive income . . . . 51,685 --------- Stock dividend (18,426,691 shares) 184 - (184) - - - Stock options exercised (1,734,544 shares) . . . . . . . 18 61,623 - - - 61,641 Repurchase of 2,143,400 shares of common stock. . . . . . . . . (21) (91,317) - - - (91,338) --------- ----------------------- --------- --------- --------- --------- BALANCE, DECEMBER 31, 1998 . . . . 364 82,396 359,454 (9,730) - 432,484 Comprehensive income Net income . . . . . . . . . . . - - (71,971) - - (71,971) Other comprehensive income, net of tax Foreign currency translation adjustments. . . - - - (3,242) - (3,242) --------- Total comprehensive income . . . . (75,213) --------- Purchase of shares for SECT. . . . - - - - (10,094) (10,094) Restricted stock vested. . . . . . - (3) - - 19 16 Restricted stock forfeited . . . . - (74) - - 74 - Stock options exercised (243,452 shares) . . . . . . . . 2 7,411 - - - 7,411 Repurchase of 1,015,513 shares of common stock. . . . . . . . . (10) (33,035) - - - (33,045) --------- ----------------------- --------- --------- --------- --------- BALANCE, DECEMBER 31, 1999 . . . . $ 356 $ 56,695 $287,483 $(12,972) $(10,001) $321,561 ========= ======================= ========= ========= ========= ========= See accompanying notes.
POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, --------------------------------------- 1999 1998 1997 --------- --------- ----------- (In thousands) OPERATING ACTIVITIES Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . $ (71,971) $ 53,271 $ 50,257 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . 201,562 87,979 72,351 Deferred income taxes . . . . . . . . . . . . . . . . . . . (46,481) 5,338 13,365 Provision for uncollectible accounts. . . . . . . . . . . . 12,350 90 2,951 Gain on disposal of discontinued operations . . . . . . . . - (1,986) - Acquisition related charges . . . . . . . . . . . . . . . . - 3,732 - Changes in assets and liabilities: Receivables . . . . . . . . . . . . . . . . . . . . . . . . 18,612 (37,775) (5,594) Accrued revenues. . . . . . . . . . . . . . . . . . . . . . (17,980) 7,739 (8,438) Other receivable. . . . . . . . . . . . . . . . . . . . . . 11,279 - - Accounts payable and accrued expenses . . . . . . . . . . . (18,023) (3,540) (4,422) Accrued restructuring and other charges . . . . . . . . . . 5,030 62 (2,307) Income taxes. . . . . . . . . . . . . . . . . . . . . . . . (14,599) 1,903 876 Unearned revenues . . . . . . . . . . . . . . . . . . . . . 1,967 (3,825) 8,966 Other, net. . . . . . . . . . . . . . . . . . . . . . . . . (1,708) (13,195) 224 ---------- ---------- ---------- Cash provided by operations. . . . . . . . . . . . . . 80,038 99,793 128,229 ---------- ---------- ---------- INVESTING ACTIVITIES Proceeds from sales/maturities of available-for-sale securities 2,108 3,257 250 Proceeds from maturities of held-to-maturity securities . . . . - 2,969 - Proceeds from sale of business segment. . . . . . . . . . . . . - 23,826 2,900 Acquisition of property and equipment . . . . . . . . . . . . . (35,937) (61,699) (31,761) Capitalized internal software development costs . . . . . . . . (67,106) (59,642) (62,508) Business acquisitions and investments . . . . . . . . . . . . . (72,589) (36,898) (4,850) Proceeds from disposal of property and equipment. . . . . . . . 1,316 1,031 806 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,441) (11,013) (2,410) ---------- ---------- ---------- Cash used by investing activities . . . . . . . . . . . . . . . . . (180,649) (138,169) (97,573) ---------- ---------- ---------- FINANCING ACTIVITIES Payments on long-term debt. . . . . . . . . . . . . . . . . . . (349,012) (67,593) (181,219) Proceeds from borrowing under credit facilities . . . . . . . . 477,200 129,500 154,634 Purchase of stock for Stock Employee Compensation Trust . . . . (10,094) - - Issuance of common stock under stock option plans . . . . . . . 7,293 61,641 11,021 Repurchase of outstanding common stock. . . . . . . . . . . . . (33,045) (91,338) (5,034) ---------- ---------- ---------- Cash provided (used) by financing activities . . . . . 92,342 32,210 (20,598) ---------- ---------- ---------- Net decrease in cash and equivalents. . . . . . . . . . . . . . . . (8,269) (6,166) 10,058 Cash and equivalents at beginning of period . . . . . . . . . . . . 26,013 32,179 22,121 ---------- ---------- ---------- Cash and equivalents at end of period . . . . . . . . . . . . . . . $ 17,744 $ 26,013 $ 32,179 ========== ========== ========== SUPPLEMENTAL INFORMATION Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,275 $ 2,174 $ 3,328 Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . 16,568 14,056 12,229 Non-cash transactions: During 1999, the Company transferred $7.8 million ($15.0 million gross cost net of amortization) of contract acquisition costs at net book value to other receivables which was paid in January 2000. During 1998, the Company recorded a liability and corresponding asset related to the deferral of $2.5 million of compensation expense payable in the form of restricted stock, vesting over five years. During 1998, the Company transferred $11.3 million of property, plant and equipment at net book value to Lockheed Martin Corporation which was paid in January 1999. See accompanying notes.
POLICY MANAGEMENT SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements are prepared on the basis of generally accepted accounting principles and include the accounts of the Company and its majority owned subsidiaries (collectively, the "Company"). All material intercompany balances and transactions have been eliminated. The equity method of accounting is used when the Company does not have effective control and has a 20% to 50% interest in other companies. Under the equity method, original investments are recorded at cost and adjusted by the Company's share of undistributed earnings or losses of these companies. USE OF ESTIMATES 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. Actual results could differ from those estimates. Financial statement line items that include significant estimates include the allowance for uncollectible receivables, accrued revenues, accrued restructuring charges, goodwill and other intangibles, net, capitalized software and costs, net, and income tax balances. REVENUE RECOGNITION The Company's revenues are generated primarily by licensing software systems and providing outsourcing and professional services to the global insurance and related financial services industries. All revenues are recorded in accordance with Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2") and Statement of Position 81-1, "Accounting for Performance of Construction-Type and Certain Product-Type Contracts" ("SOP 81-1"). Software systems are licensed under standard nonexclusive and nontransferable agreements, which generally have a noncancelable minimum term of six years and provide for an initial license charge and a monthly license charge. The initial license charge represents the grant of a right to use the software system currently available at the time the license is signed. It is recognized as revenue upon receipt of a contractual obligation and delivery of the software system provided the fee is fixed, determinable and probable of collection. The monthly license charge, which covers the right to use the product during the term of the agreement, also provides access to Maintenance, Enhancements and Services Availability ("MESA"). Under the maintenance provisions of MESA, the Company provides telephone support and error correction to current versions of licensed systems. Under the enhancement provisions of MESA, the Company will provide unspecified enhancements to the licensed systems, which the Company may deliver from time to time to licensees of those systems, if and when they become generally available. The monthly license charge is recognized as revenue on a monthly basis throughout the term of the MESA provision of the license agreement. Services Availability allows customers access to professional services, other than maintenance and enhancements, which are provided under separate arrangements during the MESA term. Customers can acquire perpetual rights to use the Company's software either at the time of the original license or at subsequent periods during the license term by paying additional license fees provided for in the contract. These fees are recognized as revenue when the perpetual rights are granted. The Company provides professional support services, including systems implementation and integration assistance, and consulting and educational services. These support services are available under services agreements and are charged for separately under time and materials contracts and in some circumstances under fixed price arrangements. Revenues from time and materials arrangements are recognized as the services are performed. Under fixed price arrangements, revenue is recognized on the basis of the estimated percentage of completion of service provided. Changes in estimates to complete and revisions in overall profit estimates are recognized in the period in which they are determined (see Note 15). Provisions for losses, if any, are recognized in the period in which they first become probable and reasonably estimable. From time to time the Company enters into joint development arrangements. Although these arrangements are varied, the Company will undertake custom development of a product or enhancement and typically retain all marketing rights and titles to such development. Joint development arrangements are generally provided for under fixed price agreements and in some circumstances on a time and materials basis. The Company recognizes revenue equal to direct cost on the same basis as professional support services; however, where technological feasibility has already been established, the Company will capitalize the portion of development costs which exceed customer funding provided under the joint development arrangement. The Company also offers Information Technology ("ITO") and Business Process Outsourcing ("BPO") services ranging from making available Company software licensed on a remote processing basis from the Company's data centers, complete systems management, processing, administrative support and automated information services to addressing the complete back office processing of insurance transactions. Outsourcing services are typically provided under contracts having terms from three to ten years. Long-term arrangements consisting of multiple elements are accounted for under percentage of completion. Revenue is recognized as services are performed and the obligations are fulfilled. Changes in estimates to complete and revisions in overall profit estimates are recognized in the period in which they are determined (see Note 15). Provisions for losses, if any, are recognized in the period in which they become probable and reasonably estimable. Accrued revenues on the Company's accompanying consolidated balance sheets represent revenues which the Company has earned in accordance with its accounting policies but that are not yet billable under the terms of the contracts as of the date of the balance sheet. These amounts are recoverable over the remaining life of the contract and are classified as either current or long-term. Generally, accrued revenues result from the timing of billings of license charges which are less than 12 months, the provisions of services and the application of percentage of completion accounting to the Company's long-term contracts. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. MARKETABLE SECURITIES Debt securities included in the Company's investment portfolio for which there is a positive intent and ability to hold to maturity are carried at amortized cost. Debt securities that may be sold prior to maturity and all marketable equity securities are classified as available-for-sale and carried at fair value. The fair value is estimated based on quoted market prices for those or similar investments. Net unrealized gains and losses, determined on the specific identification method, on securities classified as available-for-sale are carried as a separate component of accumulated other comprehensive income. Realized gains and losses are included in net income and the cost of securities sold is based on the specific identification method. Marketable securities were sold for cash proceeds of $2.1 and $3.3 million during 1999 and 1998, respectively. There were no sales of marketable securities during 1997. PROPERTY AND EQUIPMENT Property and equipment, including support software acquired for internal use, is stated at cost less accumulated depreciation and amortization. Property and equipment is depreciated on a straight-line basis over its estimated useful life. Gains and losses on dispositions of property and equipment are determined based on the difference between the cash plus the fair value of any assets received (in the case of nonmonetary transactions) less the net book value of the asset disposed of at the date of disposition. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS Identifiable intangible assets and goodwill are recorded and amortized over their estimated economic lives or periods of future benefit. The lives established for these assets are a composite of many factors which are subject to change because of the nature of the Company's operations. This is particularly true for goodwill which reflects value attributable to the going-concern nature of acquired businesses, the stability of their operations, market presence and reputation. Accordingly, the Company evaluates the continued appropriateness of these lives and recoverability of the carrying value of such assets based upon the latest available economic factors and circumstances. The Company evaluates the recoverability of all long-lived assets, including specific intangible assets and goodwill, based upon a comparison of estimated future cash flows from the related operations with the then corresponding carrying values of those assets. Impairment of value, if any, is recognized in the period in which it is determined. A rate considered to be commensurate with the risk involved is used to discount the cash flows for any recognized impairment. The Company amortizes goodwill over an estimated life of 3 to 15 years. Other identifiable purchased intangible assets are being amortized on a straight-line basis over their estimated period of benefit ranging from 3 to 10 years. CAPITALIZED SOFTWARE COSTS In accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed," ("SFAS 86") certain costs incurred in the internal development of computer software and costs of purchased computer software, consisting primarily of software acquired through business acquisitions, are capitalized. Such capitalized costs are amortized over the "estimated useful life," generally 3 to 5 years, at the greater of the amount computed using (i) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues of that product or (ii) the straight-line method. Costs which are capitalized as part of internally developed software primarily include direct and indirect costs associated with payroll, computer time and allocable depreciation and other direct allocable costs, among others. Product enhancements are improvements to existing products that are intended to extend the life or significantly improve the marketability of the original product. Costs incurred for product enhancements are charged to expense as research and development until technological feasibility of the enhancement has been established. If the original product is no longer to be marketed, the net book value of the original product is allocated to the cost of the enhancement. The cost of the enhanced product, including the cost allocated from the original product or enhancement if not allocated up, is amortized over the life of the enhancement. If the original product will remain on the market along with the enhancement, an allocation is made of the unamortized cost of the original product between the original product and the enhancement. All internal costs incurred prior to the establishment of technological feasibility have been expensed as research and development costs during the periods in which they were incurred and amounted to $0.5, $0.7 and $0.6 million for the years ended December 31, 1999, 1998 and 1997, respectively. The amount by which unamortized software costs exceeds the net realizable value, if any, is recognized as accelerated amortization in the period it is determined (see Note 6). The Company also capitalizes certain costs in accordance with Statement of Position 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). For projects to acquire, internally develop or modify software solely to meet its internal needs and for which there are no marketing plans ("internal-use software"), the Company expenses costs that are incurred in the preliminary project stage and capitalizes certain costs once the criteria in SOP 98-1 are met. Capitalized costs include payments to third parties for materials and services consumed in developing or obtaining internal-use software, employee compensation and benefits costs directly associated with the internal-use software project, and interest costs incurred during the development of internal-use software. Capitalized costs are amortized over the estimated useful life of the internal-use software, generally between 5 to 8 years. Capitalized internal-use software costs are included in property and equipment (see Note 4). INCOME TAXES The provision for income taxes and corresponding balance sheet accounts are determined in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). Under FAS 109, the deferred tax liabilities and assets are determined based on temporary differences between the basis of certain assets and liabilities for income tax and financial reporting purposes. These differences are primarily attributable to differences in the recognition of depreciation and amortization of property, equipment and intangible assets and certain software development costs and revenues. 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" ("FAS 128"). Weighted average common shares outstanding for all periods have been restated to reflect the stock split in June 1998 (see Note 11). 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 the period ended December 31, 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):
Year Ended December 31, -------------------------------- 1999 1998 1997 ---- ------ ------ Weighted Average Shares ------------------------- Basic EPS. . . . . . . . . . . 35,549 36,441 36,468 Effect of common stock options - 2,848 1,198 ------ ------ ------ Diluted EPS. . . . . . . . . . 35,549 39,289 37,666 ====== ====== ======
Weighted average shares for 1999 would have included 1,174,358 common stock equivalents if the Company had recorded net income. All options to purchase shares of common stock were included in the computation of diluted EPS for 1998. FOREIGN CURRENCY TRANSLATION The local currencies of the Company's foreign subsidiaries have been determined to be their functional currencies. Assets and liabilities of foreign subsidiaries are translated into United States dollars at current exchange rates and resulting translation adjustments are included as a separate component of accumulated other comprehensive income. Revenue and expense accounts of these operations are translated at average exchange rates prevailing during the year. Transaction gains and losses, which were not material, are included in the results of operations of the period in which they occur. The effect on the Company's operating revenues of adverse foreign currency exchange fluctuations (stated as current year international revenues translated at prior year average exchange rates) was $4.3 and $8.0 million for 1999 and 1998, respectively. NEW ACCOUNTING STANDARDS 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 had no derivative instruments at December 31, 1999 or 1998. OTHER MATTERS Certain prior year amounts have been reclassified to conform to current year presentation. NOTE 2. ACQUISITIONS On June 30, 1999, the Company purchased DORN Technology Group, Inc. ("DORN"), a risk and claims management company, for $33.2 million in cash plus additional consideration of up to $3.0 million contingent upon the future performance of DORN, to be recorded as compensation expense 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 business and further develop the Riskmaster and Quest systems to complement its existing 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. The Company intends to grow the business acquired. 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 recorded as compensation expense 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 continue growing Legalgard's existing services business and developing the technology acquired. In December 1998, the Company acquired CAF Systemhaus fur Anwendungsprogrammierung GmbH ("CAF"), headquartered in Gilching, Germany, and related entities for approximately $7.0 million. CAF's Visual Project Modeling Systems ("VP/MS") are designed to allow insurance companies to easily design and implement computer code to administer new insurance products with reduced programming cost and time-to market. On August 31, 1998, the Company purchased 100% of the outstanding common stock of The Leverage Group, Inc. ("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 PolicyLink , 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 related charges of approximately $3.7 million related to the purchase of TLG (see Note 6). 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 was substantially complete, 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 SFAS 86 and has no alternative future use other than in Research and Development. The remainder of these charges represents the previously capitalized historical cost of software purchased and internal in-process development of the Company that is no longer capitalizable based on SFAS 86 as a result of the acquisition. The acquisitions above have been recorded using the purchase method of accounting in accordance with Accounting Principles Board Option No. 16, "Accounting for Business Combinations." Accordingly, the Consolidated Statements of Operations of the Company include the results of operations from the date of acquisition. NOTE 3. RESTRUCTURING AND OTHER CHARGES During 1999, the Company recorded restructuring charges of approximately $12.9 million related to initiatives the Company took to eliminate costs through reductions in force of approximately 102 employees and reductions in space requirements. The Company also recorded $9.6 million cash charges incurred in connection with the settlement of litigation with Liberty Life Insurance Company. The 1998 and 1997 activity relates primarily to net rental payments on a facility previously vacated. The following table reflects the activity related to restructuring charges for the three years ended December 31, 1999:
Current Non-current Total ------- ----------- ------- Balance at December 31, 1996. . . . . $ 2,478 $1,340 $ 3,818 1997 net activity . . . . . . . . . . (2,333) 26 (2,307) -------- ------- -------- Balance at December 31, 1997. . . . . $ 145 $1,366 $ 1,511 -------- ------- -------- 1998 net activity . . . . . . . . . . 661 (599) 62 -------- ------- -------- Balance at December 31, 1998. . . . . $ 806 $ 767 $ 1,573 -------- ------- -------- 1999 activity: Additions: Involuntary terminations. . . . . . 6,647 617 7,264 Vacated offices . . . . . . . . . . 3,819 1,470 5,289 Reductions: Net rental payments on leased space (2,866) (140) (3,006) Payments to terminated employees. . (4,776) (55) (4,831) -------- ------- -------- Balance at December 31, 1999. . . . . $ 3,630 $2,659 $ 6,289 ======== ======= ========
NOTE 4. PROPERTY AND EQUIPMENT A summary of property and equipment is as follows (in thousands):
Estimated December 31, ---------------------- Useful Life 1999 1998 ----------- ------- ------- (Years) Land. . . . . . . . . . . . . . . . . . . . . . - $ 2,712 $ 2,562 Buildings and improvements. . . . . . . . . . . 10-40 76,101 61,509 Construction in progress. . . . . . . . . . . . - 1,588 11,922 Leasehold improvements. . . . . . . . . . . . . 1-10 7,560 5,808 Office furniture, fixtures and equipment. . . . 5-15 60,339 54,742 Computer and communications equipment and support software. . . . . . . . . . . . . 2-5 105,369 109,763 Internal use software . . . . . . . . . . . . . 3-8 17,233 11,981 Other . . . . . . . . . . . . . . . . . . . . . 3-5 4,312 5,614 ---------- -------- 275,214 263,901 Less: Accumulated depreciation and amortization (132,347) (128,363) ---------- ---------- Property and equipment, net . . . . . . . . . . $ 142,867 $ 135,538 ========== ==========
Depreciation and amortization charged to expense was $29.1, $26.4, and $27.6 million for the years ended December 31, 1999, 1998 and 1997, respectively. NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS A summary of goodwill and other intangible assets is as follows (in thousands):
December 31, ------------------------------- 1999 1998 ------- ---------- Goodwill. . . . . . . . . . . . . . . . . $102,259 $ 73,156 Customer lists. . . . . . . . . . . . . . 26,875 21,181 Contract acquisition costs. . . . . . . . - 15,000 Covenants not to compete. . . . . . . . . 11,083 9,158 Other . . . . . . . . . . . . . . . . . . 11,329 8,688 --------- --------- 151,546 127,183 Less: Accumulated amortization. . . . . . (40,522) (45,782) --------- --------- Goodwill and other intangible assets, net $111,024 $ 81,401 ========= =========
Amortization charged to expense was $20.5, $10.8 and $10.6 million for the years ended December 31, 1999, 1998 and 1997, respectively. During 1999, the Company recorded $13.1, $29.6 and $10.4 million of intangible assets related to the acquisitions of Legalgard, DORN and FAS, respectively. During 1998, the Company recorded $20.4 and $2.6 million of intangible assets related to the acquisitions of TLG and CAF, respectively. Amortization of goodwill and other intangibles during 1999 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 Statement of Financial Accounting Standards No. 121. During 1999, the Company transferred $7.8 million of contract acquisition costs at net book value ($15.0 million gross cost) to other receivables which was paid in January 2000. NOTE 6. CAPITALIZED SOFTWARE COSTS A summary of capitalized software costs is as follows (in thousands):
December 31, ------------------------------ 1999 1998 -------- ------- Internally developed software . $ 267,276 $ 374,172 Purchased software. . . . . . . 47,913 36,067 ---------- ---------- 315,189 410,239 Less: Accumulated amortization. (159,293) (189,331) ---------- ---------- Capitalized software costs, net $ 155,896 $ 220,908 ========== ==========
Amortization charged to expense was $149.4, $41.1 and $33.9 million for the years ended December 31, 1999, 1998 and 1997, respectively. During 1999, the Company recorded $9.0 and $7.5 million of purchased software related to the acquisitions of Legalgard and DORN, respectively. During 1998, the Company recorded $4.4 and $3.7 million of purchased software related to the acquisitions of CAF and TLG, respectively. During the fourth quarter of 1999, the Company recorded approximately $18.1 million of accelerated amortization with $16.3 million related to its Banking Division and approximately $1.8 million for several smaller software products primarily in its international segment. During the third quarter of 1999, the Company recorded approximately $94.3 million of accelerated amortization related to costs determined to be unrecoverable. Of this amount, approximately $77.6 million relates to Series II and S3+ , and approximately $16.7million relates to international operations. During the fourth quarter of 1998, the Company recorded impairment charges which have been reclassified to amortization in the amount of $9.6 million to write-off the unamortized portion of capitalized software development costs of principally two products. The Company had invested approximately $4.2 million in the development of a new software product called Visual Product Builder ("VPB"). VPB was intended to allow insurance companies to easily design and implement computer code to administer new insurance products with reduced programming costs and time to market. During the Company's 1998 fourth quarter strategic planning, it became apparent that for technical and architectural reasons, VPB would not reach the level of market acceptance initially anticipated. Also during the fourth quarter, the Company identified CAF as a potential acquisition candidate, primarily based on CAF's successful development of VP/MS. VP/MS provides substantially the same function as VPB but without the technical and architectural issues that VBP presented. Therefore, the Company wrote off $3.9 million of unamortized previously capitalized VPB internal development costs. Also during its 1998 fourth quarter strategic planning, the Company determined to cease marketing its policy administration software in the Latin American market to pursue an alliance with another software vendor in that market. Consequently, the Company wrote off $4.5 million of unamortized internal development costs. The remaining amount of accelerated amortization related to unamortized development costs of lesser products that were determined to be unrecoverable. NOTE 7. LONG-TERM DEBT AND OTHER BORROWINGS Long-term debt is as follows (in thousands):
December 31, ----------------------- 1999 1998 -------- -------- Credit agreement borrowings $225,000 $ 85,000 Line of credit. . . . . . . 4,000 15,000 Notes payable . . . . . . . 2,000 812 -------- -------- 231,000 100,812 Less: Current portion . . . 4,000 15,812 -------- -------- Long-term debt. . . . . . . $227,000 $ 85,000 ======== ========
Interest cost incurred was $10.6, $2.9 and $3.7 million for the years ended December 31, 1999, 1998 and 1997, respectively. Interest cost capitalized was $0.2, $0.8 and $0.1 million during 1999, 1998 and 1997, respectively. As of December 31, 1999, the Company had the following credit facilities: a $200 million line of credit with a syndicate of financial institutions which had $155 million outstanding, a $70 million term loan with three of the financial institutions in the line of credit syndicate and a $5 million uncommitted bank line of credit which had $4 million outstanding. Because of the large net loss in the fourth quarter, the Company was in violation of one of the covenants of both the line of credit and the term loan. Amendments of the related agreements were executed in February and March 2000 that return the Company to compliance. Under these amendments, the line of credit will be reduced to $180 million and, further, to $125 million on April 1, 2001. The line of credit will mature on July 1, 2001. Borrowings under the agreement bear interest at rates based upon the applicable London Interbank Offering Rate ("LIBOR") plus a spread of 2.75%. During 1999, loans under this agreement ranged in rates from 6.475% to 6.85%. Additionally, the Company pays a per annum fee on the aggregate amount of the line of credit commitment of .50%. Also, under the above-described amendments, the term loan will mature on January 31, 2001. Borrowings under the term loan bear interest payable at per annum rates based upon LIBOR plus increasing spreads over the term of the loan from 2.75% to 4.75%. Additionally, the Company pays a per annum fee on the aggregate amount of the term loan commitment of .50% and further fees of 1%, 1.25% and 1.5% of the amounts outstanding at July 15, October 15, and December 15, 2000, respectively. Both the line of credit and term loan will be secured by assets of the Company in 2000. The Company is also restricted from making certain investments and will continue to be subject to certain covenants including, but not limited, to the maintenance of an operating ratio and levels of tangible net worth. Future credit availability under the Company's amended loan agreements is dependent upon the Company achieving improvements in its operating performance. In light of the uncertainties surrounding future performance and the Company's current debt position, described above, the Company has concluded that it must restructure its capital base in order to reduce debt and take advantage of various growth opportunities. Accordingly, the Board of Directors has authorized the Company's management to explore various alternatives to achieve efficiencies and obtain equity or other financing. NOTE 8. COMMITMENTS AND CONTINGENCIES COMMITMENTS On March 27, 1995, the Company entered into a long-term license and maintenance agreement in order to acquire rights to certain operating system management software products for use in the Company's worldwide data center operations. The agreement, which was re-negotiated during 1999, has a term ending June 2009, and may be renewed and extended for an additional period of five years, subject to mutual agreement and other modifications. Minimum contract payments by the Company over the remaining ten year term total approximately $54.6 million payable in specified annual installments over the ten-year period. In addition to minimum contract payments, the Company will pay an annual supplemental revenue fee, subject to certain provisions in the agreement, equal to a specified annual percentage of the Company's applicable prior year annual gross revenues, less the specified annual installment for such period. Minimum contract payments will be expensed on a straight-line basis over the remaining ten-year term. Annual supplemental revenue fees, if any, will be accrued in the period in which determined. The agreement provisions for the supplemental revenue fee were not met for 1999 or 1998. In June 1998, a Data Processing Services Agreement was completed between the Company and Lockheed Martin Corporation ("Lockheed Martin"). Under its terms, the Company turned over operations of its Blythewood, South Carolina, data center to Lockheed Martin on July 1, 1998. The agreement sets forth an annual fee for each of the ten years of the agreement, payable in monthly installments. The amount was determined based on baseline resources, however, it will be adjusted for over or under usage of resources, inflation, and benchmarking results. The Company also made deposits of $2.6 million and a $2.0 million in 1999 and 1998, respectively. These amounts will reduce future payments beginning in June 2003. The baseline payments are as follows (in thousands):
Year Ending December 31, ------------------------ 2000 . . . $ 22,824 2001 . . . 25,439 2002 . . . 29,740 2003 . . . 30,825 2004 . . . 33,425 Thereafter 137,447 -------- Total. . . $279,700 ========
During 1997, the Company entered into two five year renewable lease and maintenance agreements to lease certain data processing equipment for use in its worldwide data center operations. Minimum lease payments over the initial terms of the agreements aggregate $8.6 million payable in specified monthly installments. At the end of the term of each agreement, the Company had the option to purchase the leased equipment at fair market value, upgrade the equipment with the latest technology, or discontinue each lease. Lockheed Martin assumed these leases. The Company leased certain data processing and related equipment primarily under operating leases expiring through 2003. Rent expense under operating leases for such equipment was $2.8, $5.2 and $7.9 million for the years ended December 31, 1999, 1998 and 1997, respectively. The Company occupies leased facilities under various operating leases expiring through 2014. The leases for certain facilities contain options for renewal and provide for escalation of annual rentals based upon increases in the lessors' operating costs. Rent expense under leases for facilities was $17.2, $12.8 and $10.0 million for the years ended December 31, 1999, 1998 and 1997, respectively. Future minimum lease obligations under noncancelable operating leases are stated below and include payments over 16 years aggregating $3.2 million related to a leasehold planned for future abandonment, net of subleases (in thousands):
Year Ending December 31, ------------------------ 2000 . . . $ 18,696 2001 . . . 16,740 2002 . . . 15,255 2003 . . . 11,220 2004 . . . 9,377 Thereafter 57,807 -------- Total. . . $129,095 ========
CONTINGENCIES - LEGAL PROCEEDINGS The Company is involved in litigation commenced in February 2000, in the District Court of Dallas County, Texas, by Chase Manhattan Mortgage Corporation ("Chase") related to the Company's mortgage loan origination products and services. The complaint alleges breach of contract, breach of warranty, misrepresentation, malpractice, misrepresentation and mismanagement and seeks a declaratory judgment and damages in excess of $20 million including amounts paid by Chase to the Company, internal costs, consulting fees, opportunity costs, reputational costs, attorneys fees and costs and punitive and exemplary damages. The Company has not yet responded to the Chase complaint, but believes that the allegations are without merit and are subject to various affirmative defenses and counterclaims. In January 2000, Computer Sciences Corporation ("CSC") filed a complaint against the Company alleging that the Company and Neuronworks, an entity retained by the Company in the development of COA, misappropriated CSC's trade secrets related to CSC's Colossus product and used such trade secrets in the development of the Company's COA product. The litigation was removed from Texas State court and is currently pending in the United States District Court for the Western District of Texas, Austin Division. CSC's complaint alleges unfair competition, product misappropriation, trade secret theft, tortious interference with existing and prospective contracts, aiding and abetting breach of fiduciary duty, and civil conspiracy. CSC's complaint seeks preliminary and permanent injunctive relief, damages, attorney's fees and punitive damages, all in an unspecified amount. The Company has denied the allegations against it and asserted various affirmative defenses and counterclaims against CSC, including counterclaims for unfair trade practices, false representation, false promotion and commercial disparagement under the Lanham Act, business disparagement, injurious falsehood, defamation, and tortious interference with existing and prospective contractual and business relationships. On March 22, 2000, a hearing was held on CSC's request for preliminary injunctive relief to enjoin the Company from marketing and licensing COA. CSC's request for preliminary injunctive relief was denied. The case has been set for trial in December 2000. The Company believes CSC's remaining claims are without merit and is vigorously defending this matter and pursuing relief on the Company's claims. On January 7, 2000, following a morning news release by the Company that fourth quarter earnings would be below analyst estimates, the Company and three of its officers were named as defendants in an purported class action complaint filed on behalf of purchasers of the Company's stock during the period between October 22, 1998 and January 6, 2000. Since this initial filing, additional purported class actions have been filed, three in the United States District Court for the District of South Carolina and two in the United States District Court for the Southern District of New York (which are in the process of being transferred to South Carolina), purportedly on behalf of purchasers of the Company's stock during the period between October 22, 1998 and February 9 or 10, 2000. These class action lawsuits allege violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 based on, among other things, alleged misleading statements, alleged failure to disclose material adverse information, alleged false financial reporting, alleged failure to report trends, demands or uncertainties, and alleged failure to implement and maintain adequate internal controls. Each of the complaints seeks unspecified compensatory damages, including interest, costs and attorney fees. At a hearing held on March 20, 2000, the court granted plaintiffs' motion to consolidate all six cases, appointed four members of the class as lead plaintiffs and approved their selection of lead counsel, directed that the complaints in all but the first-filed case be dismissed without prejudice, and directed plaintiffs to file an amended consolidated complaint within 45 days. Although the Company has not yet filed formal responses to these lawsuits, the Company believes the claims are without merit and is vigorously pursuing a full defense of these actions and allegations. On March 10, 2000, one of the Company's employees, suing allegedly on behalf of herself and all former or current participants in the Company's 401(k) Retirement Savings Plan ("Plan") during the period October 22, 1998 through February 10, 2000, commenced a purported class action against the Company, its Chairman and three members of the Administrative Committee of the Company's 401(k) Retirement Savings Plan. The action alleges that the Plan's investment in the Company's stock violated Sections 502(a)(2) and (3) of ERISA and constituted a breach of fiduciary duty given defendants' alleged knowledge that the Company's stock price was artificially inflated throughout the class period as a result of the same series of alleged materially false and misleading statements that form the basis of the securities class action described above. Although the Company's time to respond to this complaint has yet to occur, the Company believes the claims are without merit and intends to mount a vigorous defense to the allegations. 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. 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 has submitted a response to the IRS and is awaiting a formal decision. Furthermore, the Company strongly disagrees with the proposed adjustments and is vigorously defending its position. 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 9. INCOME TAXES A reconciliation of the difference between the actual income tax provision and the expected provision on pre-tax income (loss), computed using the applicable statutory rate, is as follows:
Year Ended December 31, ----------------------------- 1999 1998 1997 ---- ---- ---- Provision for taxes at the statutory rate . . . . . . . . (35.0)% 35.0% 35.0% Increase (decrease) in provision from: Goodwill. . . . . . . . . . . . . . . . . . . . . . . . 1.5 1.1 1.1 State and local income taxes, net of federal tax effect ( 2.9) 1.5 1.3 Other . . . . . . . . . . . . . . . . . . . . . . . . . ( -) 2.1 - ------- ----- ----- ( 1.4) 4.7 2.4 ------- ----- ----- Effective income tax provision rate . . . . . . . . . . . (36.4)% 39.7% 37.4% ======= ===== =====
An analysis of the income tax provision is as follows (in thousands):
Year Ended December 31, ---------------------------------------- 1999 1998 1997 ------- ------- ------- Current domestic taxes . . . . . . . . . . . . . . . . . $ 2,225 $22,470 $ 6,983 Current foreign taxes. . . . . . . . . . . . . . . . . . (596) 4,039 8,464 --------- -------- -------- Total current taxes. . . . . . . . . . . . . . . . . . 1,629 26,509 15,447 --------- -------- -------- Deferred income taxes relating to temporary differences: Depreciation and amortization of property, equipment and intangibles . . . . . . . (585) (1,608) 2,138 Capitalized software development costs . . . . . . . . (39,466) 8,281 10,917 Impairment and restructuring of operations . . . . . . - - 865 Accounts receivable. . . . . . . . . . . . . . . . . . (3,628) - - Litigation settlement and expenses, net. . . . . . . . 1,966 (553) 1,754 Contract loss reserve. . . . . . . . . . . . . . . . . (318) 1,787 24 Other. . . . . . . . . . . . . . . . . . . . . . . . . (746) 727 (1,112) --------- -------- -------- (42,777) 8,634 14,586 --------- -------- -------- Total income tax provision . . . . . . . . . . . . . . . $(41,148) $35,143 $30,033 ========= ======== ========
Actual current tax liabilities are lower than tax expenses reflected above for 1999, 1998 and 1997 by $1.7, $16.9 and $2.0 million, respectively, for the stock option deduction benefit recorded as a credit to stockholders' equity. An analysis of the net deferred income tax assets and liabilities is as follows (in thousands):
December 31, ---------------------- 1999 1998 ------- -------- Current deferred assets. . . . . . . . . . . $15,979 $ 9,336 ------- ------- Long-term deferred assets: Net operating loss carryforward. . . . . . 7,567 7,567 Foreign tax credit carryforward. . . . . . 2,202 6,161 Other. . . . . . . . . . . . . . . . . . . 20,081 11,059 ------- ------- Long-term deferred assets. . . . . . . . 29,850 24,787 ------- ------- Total deferred assets. . . . . . . . . $45,829 $34,123 ======= ======= Long-term deferred liabilities: Depreciation and amortization of property, equipment and intangibles. . . . . . . . $20,156 $17,629 Capitalized software development costs . . 34,774 77,237 Other. . . . . . . . . . . . . . . . . . . 13,584 3,367 ------- ------- Total deferred liabilities . . . . . . $68,514 $98,233 ======= =======
Certain foreign subsidiaries of the Company have net operating loss carryforwards at December 31, 1999 totaling approximately $23.4 million, which may be used to offset future taxable income. The foreign carryforwards have no expiration period. The Company has a valuation allowance of $1.4 million at December 31, 1999, related to certain of the foreign net operating losses that it does not anticipate utilizing. No provision has been made for federal income taxes on unremitted earnings of certain of the Company's foreign subsidiaries (approximately $32 million at December 31, 1999) since the Company plans to permanently reinvest all such earnings. However, if such earnings were remitted, there would be additional federal income tax expense of $1.8 million. The Company has foreign tax credit carryforwards at December 31, 1999 of $4.2 million which will expire as follows: $1.2 million on December 31, 2001 and $3.0 million on December 31, 2002. NOTE 10. EMPLOYEE BENEFIT PLANS STOCK EMPLOYEE COMPENSATION TRUST In February 1999, the Company created a Stock Employee Compensation Trust (the "SECT"). The purpose of the SECT is to purchase shares of the Company's common stock on the open market, which will be released to fund various compensation related plans as necessary. The SECT is a non-qualified grantor trust whose financial statements are consolidated with the Company's. Shares in the trust will be presented in the manner of treasury stock, as a reduction of stockholder's equity. During 1999, the SECT purchased 257,564 shares. 401(K) RETIREMENT SAVINGS PLAN The Company offers the Policy Management Systems Corporation 401(k) Retirement Savings Plan to eligible employees. The Company matches 100% of the first 3% of salary contributed by the participant and matches 50% of the next 3% of salary contributed by the participant. Subject to limits imposed by the Internal Revenue Service, the Internal Revenue Code and the Plan, participants may also make additional before-tax and after-tax contributions that are not subject to matching contributions by the Company. Participants have several options as to how their contributions and vested Company contributions are invested. Non-vested and current Plan year Company contributions are invested in common stock of the Company. The Company's contribution on behalf of participating employees was $7.1, $5.3 and $3.8 million for the years ended December 31, 1999, 1998 and 1997, respectively. RESTRICTED STOCK OWNERSHIP PLAN In August 1998, the Company established the Restricted Stock Ownership Plan. Participation in the Plan is mandatory for United States-based officers and directors until they have satisfied the applicable guidelines. Under the guidelines, officers are required to hold Company stock in multiples of their base salary ranging from 1 times salary for vice presidents, to 5 times salary for the Chief Executive Officer. Directors who are not employees are required to hold 5 times the annual retainer for directors. Directors and officers have annual targeted percentages of ownership to achieve each year and are to achieve 100% of the guideline for their office within 6 years of the Plan's adoption or their first election to the office to which this guideline is applicable. Under the Plan, annual retainers for directors and annual bonuses for officers are paid partially in cash and partially in restricted stock. Generally, for those directors and officers who have achieved their annual targeted percentages of ownership, annual retainers or any annual bonuses will be paid 50% in cash and 50% in restricted stock (with a 50% addition to the stock portion to adjust value for restrictions). For directors and officers who have not achieved their annual targeted percentage of ownership, annual retainers or any annual bonuses will be paid 100% in restricted stock (with only a 25% addition to adjust value for restrictions). Directors and officers may elect not to participate in the Plan after having achieved 100% of the stock ownership guidelines applicable to their positions. In addition, other managers who receive an annual bonus may elect to participate in a manner similar to officers who are at guideline. Shares issued under the Plan generally vest ratably over five years. The aggregate number of shares of common stock that may be issued pursuant to all awards under the Plan is 500,000 shares. During 1999 and 1998, 47,730 and 1,836 shares respectively were issued under the Plan. Also during 1999, 367 shares vested and 1,913 shares were forfeited. STOCK OWNERSHIP PLAN In May 1995, the Company established a stock ownership plan through which eligible employees of the Company and its participating affiliates may acquire shares of the Company's common stock through regular payroll deductions. Participants may make after-tax contributions in multiples of $5.00, with a minimum deduction per pay period of $10.00 and a maximum deduction per pay period of the lesser of $900.00 or 10% of regular salary. The Company makes a matching contribution equal to 15% of participants' contributions. Participants who withdraw shares acquired under the Plan within two years of the date of purchase are ineligible to make further contributions to purchase shares under the Plan for twelve months after such withdrawal. STOCK OPTION PLANS The Company has three plans under which options to purchase shares of the Company's common stock have been granted to eligible employees and members of the Board of Directors of the Company and its subsidiaries. Options under the 1999 Stock Option Plan (the "1999 Plan") and the 1989 Stock Option Plan (the "1989 Plan") expire ten years after the grant date and options under the 1993 Long Term Incentive Plan for Executives (the "1993 Plan") expire in January 2003. During 1999, options were granted under the 1999 Plan only. During 1998, options were granted under the 1989 Plan and the 1993 Plan. During 1997, options were granted under the 1989 Plan only. Options granted under the 1999 Plan have exercise prices at 100% of market value at date of grant and generally become exercisable at the rate of 25% per year beginning one year from the date of grant. Options granted under the 1989 Plan have exercise prices at 100% of market value at date of grant and generally become exercisable either at the rate of 20%, 25% or 33 1/3% per year beginning one year from date of grant. Participants in the 1993 Plan have exercise rights as a percentage of market value at date of grant as follows: 1993 - 105%; 1994 - 104%; 1995 - 103%; 1996 - 102%; 1997 - 101%; and 1998 - 100%. Options granted under the Plan in 1993 became exercisable as follows: 25% on January 1, 1995; 25% on January 1, 1997; and 50% on January 1, 1999. For individuals who were selected to participate in the Plan, the number of options granted and what percentage becomes exercisable on the above dates are determined according to formulas described in the Plan. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). This Statement requires that companies with stock-based compensation plans either recognize compensation expense based on new fair value accounting methods or continue to apply the provisions of Accounting Principles Board Opinion No. 25 and disclose pro forma net income and earnings per share assuming the fair value method had been applied. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FAS 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals (or exceeds) the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by FAS 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates of 5.9%, 5.2% and 5.7%; volatility factors of the expected market price of the Company's common stock of 38.9%, 36.2% and 35.4%; and weighted-average expected life of the options of 4.5, 4.3 and 4.4 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except per share data):
Year Ended December 31, --------------------------------- 1999 1998 1997 ---- ------- ------- Net (loss) income As reported . . . . . . . . . . $ (71,971) $53,271 $50,257 Pro forma . . . . . . . . . . . (76,190) 44,634 43,691 Basic (loss) earnings per share As reported . . . . . . . . . . $ (2.02) $ 1.46 $ 1.38 Pro forma . . . . . . . . . . . (2.14) 1.22 1.20 Diluted (loss) earnings per share As reported . . . . . . . . . . $ (2.02) $ 1.36 $ 1.33 Pro forma . . . . . . . . . . . (2.14) 1.14 1.16
Option activity under all of the stock option plans is summarized as follows:
Year Ended ------------------------------------------------ December 31, - ------------ 1999 1998 ------------------ ---------------- 1997 - ---------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Share Price --------- -------- ------------- ------- ------- ----------- Outstanding at beginning of year . . . 6,184,767 $ 27.23 7,595,780 $24.61 6,917,764 $24.48 Granted. . . . . . . . . . . . . . . . 864,450 38.53 1,037,932 34.61 1,219,500 22.95 Exercised. . . . . . . . . . . . . . . (243,452) 23.42 (2,066,731) 21.93 (480,036) 18.72 Forfeited. . . . . . . . . . . . . . . (223,864) 32.18 (382,214) 24.07 (61,448) 22.96 ----------- ------------ ---------- Outstanding at end of year . . . . . . 6,581,901 $ 28.69 6,184,767 $27.23 7,595,780 $24.61 =========== ============ ========== Options exercisable at year end. . . . 4,221,004 2,500,327 3,371,184 Shares available for future grant. . . 945,300 0 1,829,468 Weighted-average fair value of options granted during the year . . . . . . . $ 15.78 $ 12.80 $ 8.70
The following table summarizes information about fixed options outstanding at December 31, 1999:
Options Outstanding --------------------------- Options Exercisable - ------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Range of Contractual Exercise Exercise Exercise Prices Shares Life Price Shares Price -------------- ----- ------- ------- --------- ------- 15. . . . 167,368 4.3 years $15.11 167,368 $15.11 16 to 18 446,546 5.9 years 17.16 288,866 16.97 21 to 24 2,627,504 5.6 years 22.79 1,902,498 22.72 25 to 27 603,414 5.0 years 25.88 430,664 25.72 33 to 40 2,032,905 7.1 years 36.53 727,444 34.54 41 to 46 704,164 3.0 years 40.97 704,164 40.97 ---------- --------- 6,581,901. 4,221,004 ========== =========
NOTE 11. 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. NOTE 12. CERTAIN TRANSACTIONS LICENSING TRANSACTIONS Licensing revenues in 1999 include $2.5 and $4.1 million from the licensing of the recently acquired Legalgard and DORN products, respectively. Initial license revenues in 1999 also include $2.9 million for a COA license to the former owners of Legalgard, and $2.0 million for a license of several of the Company's life and financial solutions products to the former owners of FAS. License revenues in 1999 also include $3.3 million from the sale of hardware remarketed by the Company in conjunction with licenses of its software. Licensing revenues in 1998 include $2.2 million of license agreements with the purchaser of the discontinued life information services segment. Licensing revenues in 1997 include $1.8 million of initial license agreements with the purchaser of the discontinued property and casualty information services segment. DISCONTINUED OPERATIONS The Company sold its life information services segment in May 1998 for $23.8 million, net of selling expenses, resulting in a gain of $3.0 million, pretax and a gain of $0.1 million, net of tax. 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 Operations. See Note 13 for income from operations of the discontinued segment. The Company also recognized an additional loss during 1998 of $1.0 million, net of tax, on the sale of its property and casualty information services segment. This loss is included in discontinued operations in the accompanying Consolidated Statements of Operations. On August 31, 1997, the Company completed the sale of substantially all of the assets of its property and casualty information services segment for cash proceeds of $2.9 million. The Company retained the working capital of this business (approximately $14.3 million). This transaction produced a non-recurring gain of $1.7 million. Also, during the third quarter of 1997, the Company abandoned a related business. As a result, the Company recorded a non-recurring charge of $1.8 million, principally related to capitalized software. OTHER During 1999 and 1998, the Company repurchased 1,015,513 and 2,143,400 shares (2,388,200 restated for stock split) of the Company's stock on the open market, respectively. During 1997, the Company repurchased 79,900 shares (159,800 restated for stock split) of the Company's stock on the open market. NOTE 13. SEGMENT INFORMATION The Company has classified its operations into five operating segments. The 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 and Australia and Canada. 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. 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. Information about the Company's operations for the past three years is as follows:
Year Ended December 31, - ----------------------- 1999 1998 1997 - ---- ----------- ---------- (In thousands) REVENUES FROM EXTERNAL CUSTOMERS Property and casualty . . . . . . . . . . . . . $ 279,035 $278,832 $249,331 Life and financial solutions. . . . . . . . . . 189,572 150,564 101,593 ---------- --------- --------- Total US revenues . . . . . . . . . . . . . . 468,607 429,396 350,924 International . . . . . . . . . . . . . . . . . 175,412 178,062 167,247 ---------- --------- --------- Total revenues from continuing operations $ 644,019 $607,458 $518,171 ========== ========= ========= Discontinued Information Services Operations Property and casualty . . . . . . . . . . . . . $ - $ - $ 64,649 Life. . . . . . . . . . . . . . . . . . . . . . - 11,968 64,611 (LOSS) INCOME FROM CONTINUING OPERATIONS Property and casualty . . . . . . . . . . . . . $ (29,562) $ 77,563 $ 72,055 Life and financial solutions. . . . . . . . . . (4,846) 33,895 21,627 Corporate . . . . . . . . . . . . . . . . . . . (40,818) (26,434) (26,622) ---------- --------- --------- Total US operating (loss) income. . . . . . . (75,226) 85,024 67,060 International . . . . . . . . . . . . . . . . . (29,046) 2,408 12,133 ---------- --------- --------- Operating (loss) income . . . . . . . . . . (104,272) 87,432 79,193 Equity in earnings of unconsolidated affiliates 1,908 1,163 1,189 Minority interest . . . . . . . . . . . . . . . (62) (104) - Other income and expenses . . . . . . . . . . . (10,693) (2,136) (3,583) Income tax (benefit) expense. . . . . . . . . . (41,148) 32,619 28,536 ---------- --------- --------- (Loss) income from continuing operations. . $ (71,971) $ 53,736 $ 48,263 ========== ========= ========= DISCONTINUED INFORMATION SERVICES OPERATIONS Property and casualty . . . . . . . . . . . . . $ - $ (1,586) $ 533 Life. . . . . . . . . . . . . . . . . . . . . . - 3,672 2,958 Other income and expenses . . . . . . . . . . . - (27) - Income taxes. . . . . . . . . . . . . . . . . . - 2,524 1,497 ---------- --------- --------- Discontinued operations, net. . . . . . . . . $ - (465) $ 1,994 ========== ========= ========= *Income includes special charges and write-offs.
Year Ended December 31, - ------------------------------------ 1999 1998 1997 - ---- ----------- ----------- (In thousands) DEPRECIATION AND AMORTIZATION Property and casualty. . . . . . . . . . . . . . . $110,518 $29,571 $26,203 Life and financial solutions . . . . . . . . . . . 37,429 15,142 14,878 Corporate. . . . . . . . . . . . . . . . . . . . . 7,909 8,819 13,148 International. . . . . . . . . . . . . . . . . . . 45,707 23,840 16,682 Transferred to selling, general and administrative (9,774) (4,416) (3,153) --------- -------- -------- Total depreciation and amortization. . . . . . . $191,789 $72,956 $67,758 ========= ======== ======== Discontinued Information Services Operations Property and casualty. . . . . . . . . . . . . . $ - $ - $ 179 Life . . . . . . . . . . . . . . . . . . . . . . - 1,011 954
As of December 31, - -------------------------------------------------------- 1999 1998 1997 - --------- ------------- ----------- (In thousands) IDENTIFIABLE ASSETS Enterprise software and services Property and casualty. . . . . . . . . $404,465 $405,788 $339,649 Life and financial solutions . . . . . 157,312 153,484 103,701 Life information services (discontinued) - - 21,368 Corporate. . . . . . . . . . . . . . . . 36,533 36,342 34,863 --------- --------- --------- Total US identifiable assets . . . . 598,310 595,614 499,581 International. . . . . . . . . . . . . . 150,979 150,698 142,881 Eliminations . . . . . . . . . . . . . . (43,001) (27,614) (24,056) --------- --------- --------- Total identifiable assets. . . . . . $706,288 $718,698 $618,406 ========= ========= ========= LONG-LIVED ASSETS US . . . . . . . . . . . . . . . . . . . $402,005 $417,549 $361,383 International. . . . . . . . . . . . . . 90,928 83,923 71,214 --------- --------- --------- Total long-lived assets. . . . . . . $492,933 $501,472 $432,597 ========= ========= =========
NOTE 14. SIGNIFICANT RISKS AND UNCERTAINTIES 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 insurance and related financial services 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. 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. 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 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. As discussed in Note 1, 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. Financial statement line items that include significant estimates include the allowance for uncollectible receivables, accrued revenues, accrued restructuring charges, goodwill and other intangibles, net, capitalized software and costs, net, and income tax balances. Changes in the status of certain matters or facts or circumstances underlying these estimates could result in material changes to these estimates, and actual results could differ from these estimates. 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 investments that have been made in existing information systems for Year 2000 remediation and the uncertainty arising from the emergence of the Internet as a viable distribution channel for insurance. However, at this time the Company is unable to predict what the future impact of these items, if any, will be. As a result of the above and other factors, the Company's earnings and financial condition can vary significantly from quarter-to-quarter and year-to-year. These variations may contribute to volatility in the market for the Company's common stock. Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash equivalents, marketable securities and trade receivables. The Company places its cash, cash equivalents and marketable securities with high credit quality entities and limits the amount of credit exposure with any one entity. In addition, the Company performs ongoing evaluations of the relative credit standing of these entities, which are considered in the Company's investment strategy. Concentration of credit risk with respect to trade accounts receivable is generally diversified due to the large number of entities comprising the Company's customer base across the insurance industry. The Company performs ongoing credit evaluations on certain of its customers' financial conditions, but generally does not require collateral to support customer receivables. The Company includes in its allowance for uncollectible accounts amounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. NOTE 15. ACCOUNTING CHANGES Change in Accounting Principle On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"), which among other guidance clarifies certain conditions regarding the culmination of an earnings process and customer acceptance requirements in order to recognize revenue. The Company identified approximately $3.2 million of revenue recognized previously in 1999 requiring adjustment due to SAB 101. These adjustments arose from fees of $3.0 million received on two joint marketing arrangements in the second quarter, and the existence of acceptance terms in a single DORN license agreement totaling $0.2 million in the third quarter. As required by SAB 101, the Company has treated these adjustments as a change in accounting principle in accordance with Accounting Principles Board Opinion No. 20, Accounting Changes, and therefore has deferred this revenue in 1999. A cumulative catch-up adjustment of $3.2 million was recorded in the fourth quarter of 1999. Changes in Estimates As a result of 1999 fourth quarter changes in estimates related to two long-term services agreements accounted for under the percentage of completion method, the Company recorded a cumulative catch-up adjustment in the fourth quarter of 1999 of $8.4 million. The adjustment has been recorded as a reduction in Services revenues. In March 2000, certain business conditions and a new agreement led to the international adjustment of $5.3 million while the domestic adjustment of $3.1 million was a result of customer notification of the exercise of an early termination by convenience clause. During the fourth quarter of 1999 and continuing into the first quarter of 2000, rising interest rates caused significant declines in mortgage loan originations and reduced profits for mortgage loan originators. This in turn lead many existing and prospective customers of the Company's Banking Division to reevaluate their loan origination software system requirements. Consequently, the Company established reserves against approximately $8.3 million of accounts receivable based on disputes with several significant Banking Division customers. The Company is in continuing dialogue with these customers and is in various stages of negotiations or resolution concerning these disputes. During the fourth quarter of 1999, the Company recorded approximately $18.1 million of accelerated amortization with $16.3 million related to its Banking Division and approximately $1.8 million for several smaller software products primarily in its internation segment. NOTE 16. SUBSEQUENT EVENT On January 21, 2000, the Company announced its intent to change the name of the Company to Mynd Corporation. Approval requires a two-thirds vote of the shareholders at the annual shareholders meeting scheduled for May 9, 2000. If approved by shareholders, the Company will formally change its legal name with relevant authorities including the New York Stock Exchange. Meanwhile, management intends to proceed with a campaign to promote acceptance and awareness of the new name.
POLICY MANAGEMENT SYSTEMS CORPORATION QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (Unaudited) Reported Restated Reported Restated First First Second Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter -------- -------- -------- -------- -------- -------- (In thousands, except per share data) 1999 Revenues . . . . . . . . . . . . . $161,475 $160,349 $172,346 $173,532 $ 168,788 $141,350 Operating income (loss). . . . . . 23,510 22,786 25,981 27,097 (107,690) (46,465) Other (expenses) and income, net . (1,282) (1,282) (2,564) (2,564) (3,325) (3,522) Income (loss) before income taxes. 22,330 21,606 23,525 24,641 (110,709) (48,657) Cumulative effect of change in accounting principle . . . . . . - - - - - (3,200) Net income (loss). . . . . . . . . $ 14,068 $ 13,617 $ 14,820 $ 15,516 $ (70,448) $(30,655) Basic earnings (loss) per share. . $ 0.39 $ 0.38 $ 0.42 $ 0.44 $ (1.99) $ (0.86) Diluted earnings (loss) per share. $ 0.37 $ 0.36 $ 0.41 $ 0.42 $ (1.99) $ (0.86) Impact on basic earnings (loss) per share. . . . . . . . . . . . - - - - - ($0.06) Impact on diluted earnings (loss) per share. . . . . . . . . . . . - - - - - ($0.06)
The first and second quarters of 1999 have been restated to reflect principally the correction of an error caused by the oversight or misuse of the facts that existed at the time the financial statements were prepared surrounding the resolution of a dispute concerning a license agreement. On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"), which among other guidance clarifies certain conditions regarding the culmination of an earnings process and customer acceptance requirements in order to recognize revenue. The Company identified approximately $3.2 million of revenue recognized previously in 1999 requiring adjustment due to SAB 101. These adjustments arose from fees of $3.0 million received on two joint marketing arrangements in the second quarter, and the existence of acceptance terms in a single DORN license agreement totaling $0.2 million in the third quarter. As required by SAB 101, the Company has treated these adjustments as a change in accounting principle in accordance with Accounting Principles Board Opinion No. 20, Accounting Changes, and therefore has deferred this revenue in 1999. A cumulative catch-up adjustment of $3.2 million was recorded in the fourth quarter of 1999.
First Second Third Fourth Quarter --------- Quarter Quarter Quarter - ---------- ---------- --------- (In thousands, except per share data) 1998 Revenues. . . . . . . . . . . . . $140,421 $144,889 $151,303 $170,845 Operating income. . . . . . . . . 20,848 22,375 22,429 21,780 Other (expenses) and income, net. (425) (370) (603) (738) Income from continuing operations before income taxes . . . . . . 20,628 22,208 21,911 21,608 Discontinued operations, net. . . 322 (386) - (401) Net income. . . . . . . . . . . . $ 13,189 $ 13,596 $ 13,171 $ 13,315 Basic earnings per share. . . . . $ 0.36 $ 0.37 $ 0.36 $ 0.37 Diluted earnings per share. . . . $ 0.34 $ 0.34 $ 0.33 $ 0.34 1997 Revenues. . . . . . . . . . . . . $115,083 $123,828 $131,955 $147,305 Operating income. . . . . . . . . 15,774 16,643 20,738 26,038 Other (expenses) and income, net. (790) (1,012) (1,007) (774) Income from continuing operations before income taxes . . . . . . 15,354 15,951 20,005 25,489 Discontinued operations, net. . . 468 694 386 446 Net income. . . . . . . . . . . . $ 10,092 $ 10,694 $ 12,937 $ 16,534 Basic earnings per share. . . . . $ 0.28 $ 0.29 $ 0.35 $ 0.45 Diluted earnings per share. . . . $ 0.27 $ 0.29 $ 0.34 $ 0.43
The results of operations in 1998 third and forth quarters include $3.7 million and $9.6 million of charges related to the acquisition of TLG and accelerated amortization, respectively. For a further discussion of these charges see Management's Discussion and Analysis of Financial Condition and Results of Operations. SCHEDULE II
POLICY MANAGEMENT SYSTEMS CORPORATION VALUATION AND QUALIFYING ACCOUNTS Additions - ------------------- Balance Charged at Charged to Balance Beginning to Other at End Description of Period Expenses - ------------------------------------------------------------------------------------------- Accounts Deductions of Period - ---------------------------------------- (In thousands) Allowance for uncollectible amounts Year ended December 31, 1999. . . . . . . . . . . $2,051 12,350 - (1,401)(1) $13,000 Allowance for uncollectible amounts Year ended December 31, 1998. . . . . . . . . . . $2,628 90 - (667)(1) $ 2,051 Allowance for uncollectible amounts Year ended December 31, 1997. . . . . . . . . . . $ 883 2,951 - (1,206)(1) $ 2,628 Accrued restructuring and lease termination costs Year ended December 31, 1999. . . . . . . . . . . $1,573 9,472(2) - 4,756 (3) $ 6,289 Accrued restructuring and lease termination costs Year ended December 31, 1998. . . . . . . . . . . $1,511 62(2) - - $ 1,573 Accrued restructuring and lease termination costs Year ended December 31, 1997. . . . . . . . . . . $3,818 109(2) - (2,416)(3) $ 1,511 Allowance for deferred tax assets Year ended December 31, 1999. . . . . . . . . . . $1,677 - - (1,677)(4) $ - Allowance for deferred tax assets Year ended December 31, 1998. . . . . . . . . . . $2,600 - 406 (1,329)(4) $ 1,677 Allowance for deferred tax assets Year ended December 31, 1997. . . . . . . . . . . $2,804 - (204) - $ 2,600 Notes: (1) Write-off of amounts uncollectible. (2) Principally relates to amounts estimated for employee severance and outplacement and to ongoing lease obligations and/or terminations for the planned future abandonment of certain leased office facilities, including credit amounts for changes in these estimates. (3) Principally cash payments related to lease terminations and employee severance and outplacement costs. (4) Utilization of capital loss carryforwards.
REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS POLICY MANAGEMENT SYSTEMS CORPORATION Our audits of the consolidated financial statements of Policy Management Systems Corporation referred to in our report dated March 30, 2000 appearing on page 27 of this Form 10-K also included an audit of the financial statement schedule listed in the index on page 28 of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Atlanta, Georgia March 30, 2000 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information other than the listing of Executive Officers of the Company, which is set forth in Part I of this Form 10-K, is contained under the heading "Board of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 2000 Proxy Statement and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The section of the Company's 2000 Proxy Statement titled "Compensation Plans and Arrangements" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The sections of the Company's 2000 Proxy Statement titled "Principal Stockholders" and "Stock Ownership of Directors and Executive Officers" are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section of the Company's 2000 Proxy Statement titled "Compensation Committee Interlocks and Insider Participation" is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS AND SCHEDULES See Index to Consolidated Financial Statements and Supplementary Data on page 24. EXHIBITS FILED Exhibits required to be filed with this Annual Report on Form 10-K are listed in the following Exhibit Index. Pursuant to Rule 15d-21 promulgated under the Securities Exchange Act of 1934, the following annual report for the Company's employee stock purchase plan will be furnished to the Commission when the information becomes available: Form 11-K for the Company's 401(k) Retirement Savings Plan for the year ended December 31, 1999 is incorporated herein by reference. 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. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. (REGISTRANT) POLICY MANAGEMENT SYSTEMS CORPORATION BY (SIGNATURE) /s/ Timothy V. Williams (NAME AND TITLE) Timothy V. Williams, Executive Vice President DATE March 26, 1999 and Chief Financial Officer BY (SIGNATURE) /s/ Jacques E. McCormack (NAME AND TITLE) Jacques E. McCormack, Senior Vice President, DATE March 26, 1999 Corporate Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. BY (SIGNATURE) /s/ G. Larry Wilson (NAME AND TITLE) G. Larry Wilson, Chairman of the Board of Directors, DATE March 26, 1999 President and Chief Executive Officer BY (SIGNATURE) /s/ Alfred R. Berkeley, III (NAME AND TITLE) Alfred R. Berkeley, III, Director DATE March 26, 1999 BY (SIGNATURE) /s/ Donald W. Feddersen (NAME AND TITLE) Donald W. Feddersen, Director DATE March 26, 1999 BY (SIGNATURE) /s/ Dr. John M. Palms (NAME AND TITLE) Dr. John M. Palms, Director DATE March 26, 1999 BY (SIGNATURE) /s/ Joseph D. Sargent (NAME AND TITLE) Joseph D. Sargent, Director DATE March 26, 1999 BY (SIGNATURE) /s/ John P. Seibels (NAME AND TITLE) John P. Seibels, Director DATE March 26, 1999 BY (SIGNATURE) /s/ Richard G. Trub (NAME AND TITLE) Richard G. Trub, Director DATE March 26, 1999 POLICY MANAGEMENT SYSTEMS CORPORATION EXHIBIT INDEX Exhibit Number 3 ARTICLES OF INCORPORATION AND BY-LAWS .1 Bylaws of the Company, as amended through September 2, 1999, incorporating all amendments thereto subsequent to July 19, 1994 (filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1999, and is incorporated herein by reference) .2 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 .1 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) .2 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 .1 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) .2 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) .3 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) .4 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) .5 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) .6 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) .7 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) .8 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) .9 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) .10 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) .11 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) .12 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) .13 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) .14 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) .15 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) .16 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) .17 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) .18 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) .19. 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) .20 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) .21 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) .22 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) .23 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) .24 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) .25 Form of Amendment No. 1 to the Employment Agreements with Messrs. 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) .26 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 the quarter ended September 30, 1997, and is incorporated herein by reference) .27 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) .28 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) .29 Policy Management Systems Corporation Restricted Stock Ownership Plan (filed as an exhibit to Form 10-Q for the quarter ended September 30, 1998, and is incorporated herein by reference) .30 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 the quarter ended September 30, 1998, and is incorporated herein by reference) .31 Employment Agreement with Michael W. Risley dated February 23, 1999, effective November 10, 1998 (filed herewith) .32 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 the quarter ended March 31, 1999 and is incorporated herein by reference) .33 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 the quarter ended March 31, 1999 and is incorporated herein by reference) .34 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, 1999 and is incorporated herein by reference) .35 Stock Option/Non-Compete Form Agreement with Michael W. Risley dated May 11, 1999 (filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1999 and is incorporated herein by reference) .36 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 the quarter ended June 30, 1999 and is incorporated herein by reference) .37 Promissory Note dated July 21, 1999 between Policy Management Systems Corporation and First Union National Bank (filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1999 and is incorporated herein by reference) .38 Modification Number One dated October 15, 1999 to the Promissory Note between Policy Management Systems Corporation and First Union National Bank dated July 21, 1999 (filed herewith) .39 Modification Number Two dated October 28, 1999 to the Promissory Note between Policy Management Systems Corporation and First Union National Bank dated July 21, 1999 (filed herewith) .40 Stock Option/Non-Compete Form Agreement dated May 11, 1999 for named executive officers together with schedule identifying particulars for each named executive officer (filed herewith) .41 Stock Option/Non-Compete Form Agreement dated August 9, 1999 with Mr. Harald J. Karlsen (filed herewith) .42 Stock Option/Non-Compete Form Agreement dated November 8, 1999 for named executive officers together with schedule identifying particulars for each named executive officer (filed herewith) .43 Form of Restricted Stock Award Agreement dated February, 1999 for Mr. Michael D. Gantt (filed herewith) .44 Change in Control Severance Pay Plan for Select Employees dated October 22, 1996 together with schedule identifying particulars for Michael D. Gantt and Harald J. Karlsen (filed herewith) .45 Term Loan Agreement between Policy Management Systems Corporation, the Guarantors Party, Bank of America, N.A. and other financial institutions in the amount of $70 million dated November 5, 1999 (filed herewith) 21 SUBSIDIARIES OF THE REGISTRANT .1 Filed herewith 23 CONSENTS OF EXPERTS AND COUNSEL .1 Consent of PricewaterhouseCoopers filed herewith 27 FINANCIAL DATA SCHEDULES .1 1999 filed herewith (EDGAR version only) EX-10.38 2 MODIFICATION NUMBER ONE TO THE PROMISSORY NOTE Policy Management Systems Corporation One PMSC Center Blythewood, SC, South Carolina 29016 (Individually and collectively, "Borrower") First Union National Bank 201 S. College Street Charlotte, North Carolina 28288 (Hereinafter referred to as the "Bank") THIS AGREEMENT is entered into as of October 15, 1999 by and between Bank and Borrower. RECITALS Bank is the holder of a Promissory Note executed and delivered by Borrower, dated July 21, 1999, in the original principal amount of $40,000,000 (the "Note"); and Borrower and Bank have agreed to modify the terms of the Promissory Note. In consideration of Bank's continued extension of credit and the agreements contained herein, the parties agree as follows: AGREEMENT ACKNOWLEDGEMENT OF BALANCE. Borrower acknowledges that the most recent Commercial Loan Invoice sent to Borrower with respect to the obligations under the Note is correct. MODIFICATIONS. 1. The Note is hereby modified by deleting the provisions in the Note establishing the repayment terms and substituting the following in their place and stead: REPAYMENT TERMS. The Note shall be due and payable in full, including all principal and accrued interest, on October 29, 1999. ACKNOWLEDGMENTS. Borrower acknowledges and represents that the Note, as hereby amended, is in full force and effect without any defense, counterclaim, right or claim or set-off; that, after giving effect to this Agreement, no default or event that with the passage of time or giving of notice would constitute a default under the Note has occurred; that all representations and warranties contained in the Note are true and correct as of this date; that Borrower has taken all necessary action to authorize the execution and delivery of this Agreement; and that this Agreement is a modification of an existing obligation and is not a novation. MISCELLANEOUS. This Agreement shall be construed in accordance with and governed by the laws of the applicable state as originally provided in the Note, without reference to that state's conflicts of law principles. This Agreement and the Note constitute the sole agreement of the parties with respect to the subject matter thereof and supersede all oral negotiations and prior writings with respect to the subject matter thereof. No amendment of this Agreement, and no waiver of any one or more of the provisions hereof shall be effective unless set forth in writing and signed by the parties hereto. The illegality, unenforceability or inconsistency of any provision of this Agreement shall not in any way affect or impair the legality, enforceability or consistency of the remaining provisions of this Agreement or the Note. This Agreement and the Note are intended to be consistent. However, in the event of any inconsistencies among this Agreement and Note, the terms of this Agreement, and then the Note, shall control. This Agreement may be executed in any number of counterparts and by the different parties on separate counterparts. Each such counterpart shall be deemed an original, but all such counterparts shall together constitute one and the same agreement. Terms used in this Agreement which are capitalized and not otherwise defined herein shall have the meanings ascribed to such terms in the Note. IN WITNESS WHEREOF, the undersigned have signed and sealed this Agreement the day and year first above written. Policy Management Systems Corporation Taxpayer Identification Number: 57-0723125 ----------- CORPORATE By:_/s/ James J. McGovern --------------------- SEAL Senior Vice President First Union National Bank CORPORATE By:__/s/_________________ --- SEAL Title:__________________ EX-10.39 3 MODIFICATION NUMBER TWO TO THE PROMISSORY NOTE Policy Management Systems Corporation One PMSC Center Blythewood, SC, South Carolina 29016 (Individually and collectively, "Borrower") First Union National Bank 201 S. College Street Charlotte, North Carolina 28288 (Hereinafter referred to as the "Bank") THIS AGREEMENT is entered into as of October 28, 1999 by and between Bank and Borrower. RECITALS Bank is the holder of a Promissory Note executed and delivered by Borrower, dated July 21, 1999, in the original principal amount of $40,000,000 (the "Note"); and Borrower and Bank have agreed to modify the terms of the Promissory Note. In consideration of Bank's continued extension of credit and the agreements contained herein, the parties agree as follows: AGREEMENT ACKNOWLEDGEMENT OF BALANCE. Borrower acknowledges that the most recent Commercial Loan Invoice sent to Borrower with respect to the obligations under the Note is correct. MODIFICATIONS. 1. The Note is hereby modified by deleting the provisions in the Note establishing the repayment terms and substituting the following in their place and stead: REPAYMENT TERMS. The Note shall be due and payable in full, including all principal and accrued interest, on November 5, 1999. ACKNOWLEDGMENTS. Borrower acknowledges and represents that the Note, as hereby amended, is in full force and effect without any defense, counterclaim, right or claim or set-off; that, after giving effect to this Agreement, no default or event that with the passage of time or giving of notice would constitute a default under the Note has occurred; that all representations and warranties contained in the Note are true and correct as of this date; that Borrower has taken all necessary action to authorize the execution and delivery of this Agreement; and that this Agreement is a modification of an existing obligation and is not a novation. MISCELLANEOUS. This Agreement shall be construed in accordance with and governed by the laws of the applicable state as originally provided in the Note, without reference to that state's conflicts of law principles. This Agreement and the Note constitute the sole agreement of the parties with respect to the subject matter thereof and supersede all oral negotiations and prior writings with respect to the subject matter thereof. No amendment of this Agreement, and no waiver of any one or more of the provisions hereof shall be effective unless set forth in writing and signed by the parties hereto. The illegality, unenforceability or inconsistency of any provision of this Agreement shall not in any way affect or impair the legality, enforceability or consistency of the remaining provisions of this Agreement or the Note. This Agreement and the Note are intended to be consistent. However, in the event of any inconsistencies among this Agreement and Note, the terms of this Agreement, and then the Note, shall control. This Agreement may be executed in any number of counterparts and by the different parties on separate counterparts. Each such counterpart shall be deemed an original, but all such counterparts shall together constitute one and the same agreement. Terms used in this Agreement which are capitalized and not otherwise defined herein shall have the meanings ascribed to such terms in the Note. IN WITNESS WHEREOF, the undersigned have signed and sealed this Agreement the day and year first above written. Policy Management Systems Corporation Taxpayer Identification Number: ___-___________ CORPORATE By:/s/____________________________________ --- SEAL __________ President First Union National Bank CORPORATE By:/s/_______________________________________ --- SEAL Title:______________________ EX-10.40 4 EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT THIS EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT ("the Agreement") is made effective as of May 11, 1999, by and between ______________ ("EMPLOYEE") and Policy Management Systems Corporation ("PMSC"). W I T N E S S E T H: WHEREAS, EMPLOYEE has been employed by Policy Management Systems Corporation A/S, PMSC's Danish subsidiary, in a position of significant responsibility and PMSC desires to recognize EMPLOYEE'S contribution to Policy Management Systems Corporation A/S by making EMPLOYEE an "Eligible Person" as defined in the Policy Management Systems Corporation 1999 Stock Option Plan ("Plan") and therefore eligible to be granted Options as defined therein; and WHEREAS, EMPLOYEE has developed and will continue to develop intimate knowledge of PMSC's business practices, which, if exploited by EMPLOYEE in contravention of this Agreement, could seriously, adversely and irreparably affect the business of PMSC; and WHEREAS, EMPLOYEE and PMSC each desire to induce the other to enter into this Agreement; and WHEREAS, PMSC would not make EMPLOYEE an Eligible Person in the event that EMPLOYEE refused to agree to the terms and conditions of this Agreement and thus EMPLOYEE would not be eligible to receive Options under the Plan; NOW, THEREFORE, in consideration of the premises and the mutual promises and covenants of the parties hereto, EMPLOYEE and PMSC agree as follows: 1. Grant. Effective May 11, 1999, PMSC grants EMPLOYEE "non-qualified" ----- Options to purchase up to _________ shares of PMSC common stock pursuant to the Plan. Non-qualified options are subject to tax upon exercise as set forth in paragraph 6 below. 2. Price and Expiration. The option price of the shares subject to these ---------------------- Options is the closing price of the stock on the New York Stock Exchange on the date of grant, i.e., $40.125. These Options must be exercised within ten (10) years of the effective date of this Agreement or they expire. 3. Availability for Exercise. 25% of the shares subject to the Options --------------------------- granted will become available for exercise at the end of each of the four (4) years following the effective date of this Agreement. For example 25% of the total number of Options granted will be available for exercise beginning May 11, 2000; 50% will be available for exercise beginning May 11, 2001; 75% will be available for exercise beginning May 11, 2002; and 100% will be available for exercise beginning May 11, 2003. Once Options become available for exercise, they will remain available for exercise in accordance with the terms of the Plan unless they expire. 3a. Restriction on Exercise. Notwithstanding the foregoing, (a) the ------------------------- Options hereby granted shall not be exercisable until such time as the common stock to be issued on exercise of the Options has been registered under the Securities Act of 1933 or PMSC has otherwise qualified such issuance of shares under an exemption from registration under said Act; and (b) no more than one-third of the total number of Options hereby granted may be exercised in any calendar year; provided however, all vested Options may be exercised regardless of the one-third limit per calendar year after the earlier of: (i) May 11, 2007; (ii) a Change in Control as defined in the Plan; or (iii) EMPLOYEE's "retirement", as defined in the Policy Management Systems Corporation 401(k) Retirement Savings Plan. 4. Change in Control. If there is a Change in Control of PMSC prior to the ----------------- Expiration Date, the Options shall vest and become exercisable in accordance with the provisions of Section 16 of the Plan. 5. Order of Exercise. The Options may be exercised without regard to the ------------------- order in which these and any other Options were granted and without regard to any unexpired and unexercised qualified, Incentive Stock Options ("ISO's") or other non-qualified options. 6. Tax Liability. The tax liability which EMPLOYEE may incur relating to -------------- these Options is described below based upon present law and regulations which are subject to change. Taxes incurred are: + when options are granted - none --------------------------- + when options are exercised - the difference between the fair market value --------------------------- of the stock at the date of exercise of an Option and the option price is a capital gain but generally will be treated as ordinary income during the year the Option is exercised. Such tax liability is created at the time EMPLOYEE exercises an Option and PMSC is required to collect withholding taxes from EMPLOYEE. Federal income taxes (computed at a rate of 28% of the above described difference) and FICA and state income taxes (computed at the applicable rate of the above described difference) are withheld. For example if the option price is $33.00 and the fair market value at the date of the exercise is $38.00, the difference is $5.00, and assuming an applicable FICA rate of 7.65% and state income tax rate of 7%, along with the 28% federal income tax, the Company would collect a tax of $2.13 per share from EMPLOYEE. + when shares are sold - the difference between the fair market value at the -------------------- date of exercise (the $38.00 in the above example) and the price at which EMPLOYEE sells the stock is treated the same as above described during the year in which EMPLOYEE sells the stock purchased by exercise of his or her Options. 7. Exercise and Payment. Exercises of Options shall only be handled ---------------------- pursuant to the Instructions set forth on the last page of this Agreement. To exercise these Options, EMPLOYEE shall make payment in full to PMSC for the option price of the shares to be purchased plus the combined (federal, FICA and state) tax liability EMPLOYEE incurs. Such taxes paid to PMSC will be forwarded to the Internal Revenue Service and appropriate state tax commission and credited to EMPLOYEE in the same manner as the withholding tax on EMPLOYEE's salary. EMPLOYEE's actual tax will depend upon the overall tax rate calculated when EMPLOYEE prepares his or her tax returns. EMPLOYEE should consult a tax professional regarding questions about EMPLOYEE's actual tax liability. 8. Noncompetition. In consideration of the Options hereby granted, -------------- EMPLOYEE covenants and agrees that EMPLOYEE shall devote his or her best efforts to furthering the best interests of PMSC and that for the one (1) year period from the effective date hereof, and if EMPLOYEE separates from employment with PMSC for any reason within said one (1) year period, then for a one (1) year period from the date of such separation from employment, EMPLOYEE shall not "Compete" with PMSC. The region within which EMPLOYEE agrees not to Compete with PMSC is the United States, Canada and those countries in which PMSC has customers or clients as of the date of EMPLOYEE's separation from employment. For the purpose of this Agreement, the term "Compete" shall have its commonly understood meaning which shall include, but not be limited by, the following items with respect to PMSC's insurance application software licensing, data processing, consulting and information services businesses and any other businesses carried on by PMSC at the time of EMPLOYEE's separation from employment: (i) soliciting or accepting as a client or customer any individual, partnership, corporation, trust or association that was a client, customer or actively sought after prospective client or customer of PMSC during the twelve (12) calendar month period immediately preceding the date of EMPLOYEE's separation from employment; (ii) acting as an employee, independent contractor, agent, representative, consultant, officer, director, or otherwise affiliated party of any entity or enterprise which is competing with PMSC in offering similar application software or services to parties described in (i) above; or (iii) participating in any such competing entity or enterprise as an owner, partner, limited partner, joint venturer, creditor or stockholder (except as an equity holder holding less than a one percent (1%) interest). 9. Non-Hiring. During EMPLOYEE'S employment with PMSC and for a period of ---------- three (3) years after separation from such employment, EMPLOYEE agrees that EMPLOYEE shall under no circumstances hire, attempt to hire or assist or be involved in the hiring of any employee of PMSC either on EMPLOYEE'S behalf or on behalf of any other person, entity or enterprise. Also, for a similar period of time, EMPLOYEE agrees to not communicate to any such person, entity or enterprise the names, addresses or any other information concerning any employee of PMSC or any past, present or prospective client or customer of PMSC. 10. Equitable Relief. EMPLOYEE acknowledges (i) that EMPLOYEE'S skill, ----------------- knowledge, ability and expertise in the business described herein is of a special, unique, unusual, extraordinary, and/or intellectual character which gives said skill, etc. a peculiar value; (ii) that PMSC could not reasonably or adequately be compensated in damages in an action at law for breach of this Agreement; and (iii) that a breach of any of the provisions contained in this Agreement could be extremely detrimental to PMSC and could cause PMSC irreparable injury and damage. Therefore, EMPLOYEE agrees that PMSC shall be entitled, in addition to any other remedies it may have under this Agreement or otherwise, to preliminary and permanent injunctive and other equitable relief to prevent or curtail any breach of this Agreement; provided, however, that no specification in this Agreement of a specific legal or equitable remedy shall be construed as a waiver of or prohibition against the pursuing of other legal or equitable remedies in the event of such a breach. 11. Breach of Agreement. EMPLOYEE agrees that in the event EMPLOYEE --------------------- breaches any provision of this Agreement, PMSC shall be entitled, in addition to any other remedies it may have under this Agreement, to offset, to the extent of any liability, loss, damage or injury from such breach, any payments due to EMPLOYEE pursuant to his or her employment with PMSC. 12. Employment Understanding. This Agreement constitutes the entire ------------------------- agreement between the parties with regard to the subject matter hereof, and there are no agreements, understandings, restrictions, warranties or representations between the parties relating to said subject matter other than those set forth or provided for herein or in any Agreement Not To Divulge or employment agreement between PMSC and EMPLOYEE. It is understood that PMSC's and EMPLOYEE's relationship is one of "at will" employment unless EMPLOYEE and PMSC have entered into a written employment agreement which provides otherwise. This Agreement shall not affect, or be affected by, any employment agreement, if any, between PMSC and EMPLOYEE. It is understood further that the granting of Options under this Agreement does not entitle EMPLOYEE to receive additional Option grants in future years. 13. General. In the event that any provision of this Agreement or any word, ------- phrase, clause, sentence or other portion thereof (including, without limitation, the geographical and temporal restrictions contained herein) should be held to be unenforceable or invalid for any reason, such provision or portion thereof shall be modified or deleted in such a manner so as to make this Agreement enforceable to the fullest extent permitted under applicable laws. All references to PMSC shall include its subsidiaries as applicable. This Agreement shall inure to the benefit of and be enforceable by PMSC and its successors and assigns. No provision of this Agreement may be changed, modified, waived or terminated, except by an instrument in writing signed by the party against whom the enforcement of such is sought. No waiver of any provision or provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. Headings in this Agreement are inserted solely as a matter of convenience and reference and are not a part of this Agreement in any substantive sense. This Agreement may be executed in two counterparts, each of which will take effect as an original and shall evidence one and the same Agreement. 14. Plan Controls. In the event of any discrepancy between this Agreement -------------- and the Plan as to the terms and conditions of the Options, the Plan shall control. 15. Governing Law. The terms of this Agreement shall be governed by and -------------- construed in accordance with the laws of the State of South Carolina. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the date first above written. POLICY MANAGEMENT SYSTEMS CORPORATION "PMSC" BY: _/s/ Stephen G. Morrison -------------------------- Stephen G. Morrison TITLE: Executive Vice President -------------------------- EMPLOYEE _/s/ --- (Signature) (Type or Print Name) ____________________________________ (Date Signed by Employee) SCHEDULE OF PARTICULARS FOR NAMED EXECUTIVE OFFICERS RE: EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT NAMED EXECUTIVE NUMBER OFFICER GRANTED Michael D. Gantt 50,000 Harald J. Karlsen 7,500 EX-10.41 5 EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT THIS EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT ("the Agreement") is made effective as of August 9, 1999, by and between HARALD J. KARLSEN ("EMPLOYEE") and Policy Management Systems Corporation ("PMSC"). W I T N E S S E T H: WHEREAS, EMPLOYEE has been employed by Policy Management Systems Corporation A/S, PMSC's Danish subsidiary, in a position of significant responsibility and PMSC desires to recognize EMPLOYEE'S contribution to Policy Management Systems Corporation A/S by making EMPLOYEE an "Eligible Person" as defined in the Policy Management Systems Corporation 1999 Stock Option Plan ("Plan") and therefore eligible to be granted Options as defined therein; and WHEREAS, EMPLOYEE has developed and will continue to develop intimate knowledge of PMSC's business practices, which, if exploited by EMPLOYEE in contravention of this Agreement, could seriously, adversely and irreparably affect the business of PMSC; and WHEREAS, EMPLOYEE and PMSC each desire to induce the other to enter into this Agreement; and WHEREAS, PMSC would not make EMPLOYEE an Eligible Person in the event that EMPLOYEE refused to agree to the terms and conditions of this Agreement and thus EMPLOYEE would not be eligible to receive Options under the Plan; NOW, THEREFORE, in consideration of the premises and the mutual promises and covenants of the parties hereto, EMPLOYEE and PMSC agree as follows: 1. Grant. Effective August 9, 1999, PMSC grants EMPLOYEE "non-qualified" ----- Options to purchase up to 3,250 shares of PMSC common stock pursuant to the ----- Plan. Non-qualified options are subject to tax upon exercise as set forth in paragraph 6 below. 2. Price and Expiration. The option price of the shares subject to these ---------------------- Options is the closing price of the stock on the New York Stock Exchange on the date of grant, i.e., $30.4375. These Options must be exercised within ten (10) years of the effective date of this Agreement or they expire. 3. Availability for Exercise. 25% of the shares subject to the Options --------------------------- granted will become available for exercise at the end of each of the four (4) years following the effective date of this Agreement. For example 25% of the total number of Options granted will be available for exercise beginning August 9, 2000; 50% will be available for exercise beginning August 9, 2001; 75% will be available for exercise beginning August 9, 2002; and 100% will be available for exercise beginning August 9, 2003. Once Options become available for exercise, they will remain available for exercise in accordance with the terms of the Plan unless they expire. Notwithstanding the foregoing, the Options hereby granted shall not be exercisable until such time as the common stock to be issued on exercise of the Options has been registered under the Securities Act of 1933 or PMSC has otherwise qualified such issuance of shares under an exemption from registration under said Act. 4. Change in Control. If there is a Change in Control of PMSC prior to the ----------------- Expiration Date, the Options shall vest and become exercisable in accordance with the provisions of Section 16 of the Plan. 5. Order of Exercise. The Options may be exercised without regard to the ------------------- order in which these and any other Options were granted and without regard to any unexpired and unexercised qualified, Incentive Stock Options ("ISO's") or other non-qualified options. 6. Tax Liability. The tax liability which EMPLOYEE may incur relating to -------------- these Options is described below based upon present law and regulations which are subject to change. Taxes incurred are: + when options are granted - none --------------------------- + when options are exercised - the difference between the fair market value --------------------------- of the stock at the date of exercise of an Option and the option price is a capital gain but generally will be treated as ordinary income during the year the Option is exercised. Such tax liability is created at the time EMPLOYEE exercises an Option and PMSC is required to collect withholding taxes from EMPLOYEE. Federal income taxes (computed at a rate of 28% of the above described difference) and FICA and state income taxes (computed at the applicable rate of the above described difference) are withheld. For example if the option price is $33.00 and the fair market value at the date of the exercise is $38.00, the difference is $5.00, and assuming an applicable FICA rate of 7.65% and state income tax rate of 7%, along with the 28% federal income tax, the Company would collect a tax of $2.13 per share from EMPLOYEE. + when shares are sold - the difference between the fair market value at the -------------------- date of exercise (the $38.00 in the above example) and the price at which EMPLOYEE sells the stock is treated the same as above described during the year in which EMPLOYEE sells the stock purchased by exercise of his or her Options. 7. Exercise and Payment. Exercises of Options shall only be handled ---------------------- pursuant to the Instructions set forth on the last page of this Agreement. To exercise these Options, EMPLOYEE shall make payment in full to PMSC for the option price of the shares to be purchased plus the combined (federal, FICA and state) tax liability EMPLOYEE incurs. Such taxes paid to PMSC will be forwarded to the Internal Revenue Service and appropriate state tax commission and credited to EMPLOYEE in the same manner as the withholding tax on EMPLOYEE's salary. EMPLOYEE's actual tax will depend upon the overall tax rate calculated when EMPLOYEE prepares his or her tax returns. EMPLOYEE should consult a tax professional regarding questions about EMPLOYEE's actual tax liability. 8. Noncompetition. In consideration of the Options hereby granted, -------------- EMPLOYEE covenants and agrees that EMPLOYEE shall devote his or her best efforts to furthering the best interests of PMSC and that for the one (1) year period from the effective date hereof, and if EMPLOYEE separates from employment with PMSC for any reason within said one (1) year period, then for a one (1) year period from the date of such separation from employment, EMPLOYEE shall not "Compete" with PMSC. The region within which EMPLOYEE agrees not to Compete with PMSC is the United States, Canada and those countries in which PMSC has customers or clients as of the date of EMPLOYEE's separation from employment. For the purpose of this Agreement, the term "Compete" shall have its commonly understood meaning which shall include, but not be limited by, the following items with respect to PMSC's insurance application software licensing, data processing, consulting and information services businesses and any other businesses carried on by PMSC at the time of EMPLOYEE's separation from employment: (i) soliciting or accepting as a client or customer any individual, partnership, corporation, trust or association that was a client, customer or actively sought after prospective client or customer of PMSC during the twelve (12) calendar month period immediately preceding the date of EMPLOYEE's separation from employment; (ii) acting as an employee, independent contractor, agent, representative, consultant, officer, director, or otherwise affiliated party of any entity or enterprise which is competing with PMSC in offering similar application software or services to parties described in (i) above; or (iii) participating in any such competing entity or enterprise as an owner, partner, limited partner, joint venturer, creditor or stockholder (except as an equity holder holding less than a one percent (1%) interest). 9. Non-Hiring. During EMPLOYEE'S employment with PMSC and for a period of ---------- three (3) years after separation from such employment, EMPLOYEE agrees that EMPLOYEE shall under no circumstances hire, attempt to hire or assist or be involved in the hiring of any employee of PMSC either on EMPLOYEE'S behalf or on behalf of any other person, entity or enterprise. Also, for a similar period of time, EMPLOYEE agrees to not communicate to any such person, entity or enterprise the names, addresses or any other information concerning any employee of PMSC or any past, present or prospective client or customer of PMSC. 10. Equitable Relief. EMPLOYEE acknowledges (i) that EMPLOYEE'S skill, ----------------- knowledge, ability and expertise in the business described herein is of a special, unique, unusual, extraordinary, and/or intellectual character which gives said skill, etc. a peculiar value; (ii) that PMSC could not reasonably or adequately be compensated in damages in an action at law for breach of this Agreement; and (iii) that a breach of any of the provisions contained in this Agreement could be extremely detrimental to PMSC and could cause PMSC irreparable injury and damage. Therefore, EMPLOYEE agrees that PMSC shall be entitled, in addition to any other remedies it may have under this Agreement or otherwise, to preliminary and permanent injunctive and other equitable relief to prevent or curtail any breach of this Agreement; provided, however, that no specification in this Agreement of a specific legal or equitable remedy shall be construed as a waiver of or prohibition against the pursuing of other legal or equitable remedies in the event of such a breach. 11. Breach of Agreement. EMPLOYEE agrees that in the event EMPLOYEE --------------------- breaches any provision of this Agreement, PMSC shall be entitled, in addition to any other remedies it may have under this Agreement, to offset, to the extent of any liability, loss, damage or injury from such breach, any payments due to EMPLOYEE pursuant to his or her employment with PMSC. 12. Employment Understanding. This Agreement constitutes the entire ------------------------- agreement between the parties with regard to the subject matter hereof, and there are no agreements, understandings, restrictions, warranties or representations between the parties relating to said subject matter other than those set forth or provided for herein or in any Agreement Not To Divulge or employment agreement between PMSC and EMPLOYEE. It is understood that PMSC's and EMPLOYEE's relationship is one of "at will" employment unless EMPLOYEE and PMSC have entered into a written employment agreement which provides otherwise. This Agreement shall not affect, or be affected by, any employment agreement, if any, between PMSC and EMPLOYEE. It is understood further that the granting of Options under this Agreement does not entitle EMPLOYEE to receive additional Option grants in future years. 13. General. In the event that any provision of this Agreement or any word, ------- phrase, clause, sentence or other portion thereof (including, without limitation, the geographical and temporal restrictions contained herein) should be held to be unenforceable or invalid for any reason, such provision or portion thereof shall be modified or deleted in such a manner so as to make this Agreement enforceable to the fullest extent permitted under applicable laws. All references to PMSC shall include its subsidiaries as applicable. This Agreement shall inure to the benefit of and be enforceable by PMSC and its successors and assigns. No provision of this Agreement may be changed, modified, waived or terminated, except by an instrument in writing signed by the party against whom the enforcement of such is sought. No waiver of any provision or provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. Headings in this Agreement are inserted solely as a matter of convenience and reference and are not a part of this Agreement in any substantive sense. This Agreement may be executed in two counterparts, each of which will take effect as an original and shall evidence one and the same Agreement. 14. Plan Controls. In the event of any discrepancy between this Agreement -------------- and the Plan as to the terms and conditions of the Options, the Plan shall control. 15. Governing Law. The terms of this Agreement shall be governed by and -------------- construed in accordance with the laws of the State of South Carolina. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the date first above written. POLICY MANAGEMENT SYSTEMS CORPORATION "PMSC" BY: _/s/ Stephen G. Morrison -------------------------- Stephen G. Morrison TITLE: Executive Vice President -------------------------- EMPLOYEE /s/ Harald J. Karlsen - ------------------------ (Signature) Harald J. Karlsen - ------------------- (Type or Print Name) _____________________________________ (Date Signed by Employee) EX-10.42 6 EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT THIS EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT ("the Agreement") is made effective as of November 8, 1999, by and between _______________ ("EMPLOYEE") and Policy Management Systems Corporation ("PMSC"). W I T N E S S E T H: WHEREAS, EMPLOYEE has been employed by PMSC in a position of significant responsibility and PMSC desires to recognize EMPLOYEE'S contribution to PMSC by making EMPLOYEE an "Eligible Person" as defined in the Policy Management Systems Corporation 1999 Stock Option Plan ("Plan") and therefore eligible to be granted Options as defined therein; and WHEREAS, EMPLOYEE has developed and will continue to develop intimate knowledge of PMSC's business practices, which, if exploited by EMPLOYEE in contravention of this Agreement, could seriously, adversely and irreparably affect the business of PMSC; and WHEREAS, EMPLOYEE and PMSC each desire to induce the other to enter into this Agreement; and WHEREAS, PMSC would not make EMPLOYEE an Eligible Person in the event that EMPLOYEE refused to agree to the terms and conditions of this Agreement and thus EMPLOYEE would not be eligible to receive Options under the Plan; NOW, THEREFORE, in consideration of the premises and the mutual promises and covenants of the parties hereto, EMPLOYEE and PMSC agree as follows: 1. Grant. Effective November 8, 1999, PMSC grants EMPLOYEE "non-qualified" ----- Options to purchase up to _______ shares of PMSC common stock pursuant to the ------- Plan. Non-qualified options are subject to tax upon exercise as set forth in paragraph 6 below. 2. Price and Expiration. The option price of the shares subject to these ---------------------- Options is the closing price of the stock on the New York Stock Exchange on the date of grant, i.e., $20.50. These Options must be exercised within ten (10) years of the effective date of this Agreement or they expire. 3. Availability for Exercise. 25% of the shares subject to the Options --------------------------- granted will become available for exercise at the end of each of the four (4) years following the effective date of this Agreement. For example 25% of the total number of Options granted will be available for exercise beginning November 8, 2000; 50% will be available for exercise beginning November 8, 2001; 75% will be available for exercise beginning November 8, 2002; and 100% will be available for exercise beginning November 8, 2003. Once Options become available for exercise, they will remain available for exercise in accordance with the terms of the Plan unless they expire. 3a. Restriction on Exercise. Notwithstanding the foregoing, (a) the ------------------------- Options hereby granted shall not be exercisable until such time as the common stock to be issued on exercise of the Options has been registered under the Securities Act of 1933 or PMSC has otherwise qualified such issuance of shares under an exemption from registration under said Act; and (b) no more than one-third of the total number of Options hereby granted may be exercised in any calendar year; provided however, all vested Options may be exercised regardless of the one-third limit per calendar year after the earlier of: (i) November 8, 2007; (ii) a Change in Control as defined in the Plan; or (iii) EMPLOYEE's "retirement", as defined in the Policy Management Systems Corporation 401(k) Retirement Savings Plan. 4. Change in Control. If there is a Change in Control of PMSC prior to the ----------------- Expiration Date, the Options shall vest and become exercisable in accordance with the provisions of Section 16 of the Plan. 5. Order of Exercise. The Options may be exercised without regard to the ------------------- order in which these and any other Options were granted and without regard to any unexpired and unexercised qualified, Incentive Stock Options ("ISO's") or other non-qualified options. 6. Tax Liability. The tax liability which EMPLOYEE may incur relating to -------------- these Options is described below based upon present law and regulations which are subject to change. Taxes incurred are: + when options are granted - none --------------------------- + when options are exercised - the difference between the fair market value --------------------------- of the stock at the date of exercise of an Option and the option price is a capital gain but generally will be treated as ordinary income during the year the Option is exercised. Such tax liability is created at the time EMPLOYEE exercises an Option and PMSC is required to collect withholding taxes from EMPLOYEE. Federal income taxes (computed at a rate of 28% of the above described difference) and FICA and state income taxes (computed at the applicable rate of the above described difference) are withheld. For example if the option price is $33.00 and the fair market value at the date of the exercise is $38.00, the difference is $5.00, and assuming an applicable FICA rate of 7.65% and state income tax rate of 7%, along with the 28% federal income tax, the Company would collect a tax of $2.13 per share from EMPLOYEE. + when shares are sold - the difference between the fair market value at the -------------------- date of exercise (the $38.00 in the above example) and the price at which EMPLOYEE sells the stock is treated the same as above described during the year in which EMPLOYEE sells the stock purchased by exercise of his or her Options. 7. Exercise and Payment. Exercises of Options shall only be handled ---------------------- pursuant to the Instructions set forth on the last page of this Agreement. To exercise these Options, EMPLOYEE shall make payment in full to PMSC for the option price of the shares to be purchased plus the combined (federal, FICA and state) tax liability EMPLOYEE incurs. Such taxes paid to PMSC will be forwarded to the Internal Revenue Service and appropriate state tax commission and credited to EMPLOYEE in the same manner as the withholding tax on EMPLOYEE's salary. EMPLOYEE's actual tax will depend upon the overall tax rate calculated when EMPLOYEE prepares his or her tax returns. EMPLOYEE should consult a tax professional regarding questions about EMPLOYEE's actual tax liability. 8. Noncompetition. In consideration of the Options hereby granted, -------------- EMPLOYEE covenants and agrees that EMPLOYEE shall devote his or her best efforts to furthering the best interests of PMSC and that for the one (1) year period from the effective date hereof, and if EMPLOYEE separates from employment with PMSC for any reason within said one (1) year period, then for a one (1) year period from the date of such separation from employment, EMPLOYEE shall not "Compete" with PMSC. The region within which EMPLOYEE agrees not to Compete with PMSC is the United States, Canada and those countries in which PMSC has customers or clients as of the date of EMPLOYEE's separation from employment. For the purpose of this Agreement, the term "Compete" shall have its commonly understood meaning which shall include, but not be limited by, the following items with respect to PMSC's insurance application software licensing, data processing, consulting and information services businesses and any other businesses carried on by PMSC at the time of EMPLOYEE's separation from employment: (i) soliciting or accepting as a client or customer any individual, partnership, corporation, trust or association that was a client, customer or actively sought after prospective client or customer of PMSC during the twelve (12) calendar month period immediately preceding the date of EMPLOYEE's separation from employment; (ii) acting as an employee, independent contractor, agent, representative, consultant, officer, director, or otherwise affiliated party of any entity or enterprise which is competing with PMSC in offering similar application software or services to parties described in (i) above; or (iii) participating in any such competing entity or enterprise as an owner, partner, limited partner, joint venturer, creditor or stockholder (except as an equity holder holding less than a one percent (1%) interest). 9. Non-Hiring. During EMPLOYEE'S employment with PMSC and for a period of ---------- three (3) years after separation from such employment, EMPLOYEE agrees that EMPLOYEE shall under no circumstances hire, attempt to hire or assist or be involved in the hiring of any employee of PMSC either on EMPLOYEE'S behalf or on behalf of any other person, entity or enterprise. Also, for a similar period of time, EMPLOYEE agrees to not communicate to any such person, entity or enterprise the names, addresses or any other information concerning any employee of PMSC or any past, present or prospective client or customer of PMSC. 10. Equitable Relief. EMPLOYEE acknowledges (i) that EMPLOYEE'S skill, ----------------- knowledge, ability and expertise in the business described herein is of a special, unique, unusual, extraordinary, and/or intellectual character which gives said skill, etc. a peculiar value; (ii) that PMSC could not reasonably or adequately be compensated in damages in an action at law for breach of this Agreement; and (iii) that a breach of any of the provisions contained in this Agreement could be extremely detrimental to PMSC and could cause PMSC irreparable injury and damage. Therefore, EMPLOYEE agrees that PMSC shall be entitled, in addition to any other remedies it may have under this Agreement or otherwise, to preliminary and permanent injunctive and other equitable relief to prevent or curtail any breach of this Agreement; provided, however, that no specification in this Agreement of a specific legal or equitable remedy shall be construed as a waiver of or prohibition against the pursuing of other legal or equitable remedies in the event of such a breach. 11. Breach of Agreement. EMPLOYEE agrees that in the event EMPLOYEE --------------------- breaches any provision of this Agreement, PMSC shall be entitled, in addition to any other remedies it may have under this Agreement, to offset, to the extent of any liability, loss, damage or injury from such breach, any payments due to EMPLOYEE pursuant to his or her employment with PMSC. 12. Employment Understanding. This Agreement constitutes the entire ------------------------- agreement between the parties with regard to the subject matter hereof, and there are no agreements, understandings, restrictions, warranties or representations between the parties relating to said subject matter other than those set forth or provided for herein or in any Agreement Not To Divulge or employment agreement between PMSC and EMPLOYEE. It is understood that PMSC's and EMPLOYEE's relationship is one of "at will" employment unless EMPLOYEE and PMSC have entered into a written employment agreement which provides otherwise. This Agreement shall not affect, or be affected by, any employment agreement, if any, between PMSC and EMPLOYEE. It is understood further that the granting of Options under this Agreement does not entitle EMPLOYEE to receive additional Option grants in future years. 13. General. In the event that any provision of this Agreement or any word, ------- phrase, clause, sentence or other portion thereof (including, without limitation, the geographical and temporal restrictions contained herein) should be held to be unenforceable or invalid for any reason, such provision or portion thereof shall be modified or deleted in such a manner so as to make this Agreement enforceable to the fullest extent permitted under applicable laws. All references to PMSC shall include its subsidiaries as applicable. This Agreement shall inure to the benefit of and be enforceable by PMSC and its successors and assigns. No provision of this Agreement may be changed, modified, waived or terminated, except by an instrument in writing signed by the party against whom the enforcement of such is sought. No waiver of any provision or provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. Headings in this Agreement are inserted solely as a matter of convenience and reference and are not a part of this Agreement in any substantive sense. This Agreement may be executed in two counterparts, each of which will take effect as an original and shall evidence one and the same Agreement. 14. Plan Controls. In the event of any discrepancy between this Agreement -------------- and the Plan as to the terms and conditions of the Options, the Plan shall control. 15. Governing Law. The terms of this Agreement shall be governed by and -------------- construed in accordance with the laws of the State of South Carolina. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the date first above written. POLICY MANAGEMENT SYSTEMS CORPORATION "PMSC" BY: _________________________________ Stephen G. Morrison TITLE: Executive Vice President -------------------------- EMPLOYEE _____________________________________ (Signature) (Type or Print Name) _____________________________________ (Date Signed by Employee) SCHEDULE OF PARTICULARS FOR NAMED EXECUTIVE OFFICERS RE: EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT NAMED EXECUTIVE NUMBER OFFICER GRANTED Michael D. Gantt 12,500 Michael W. Risley 20,000 EX-10.43 7 POLICY MANAGEMENT SYSTEMS CORPORATION RESTRICTED STOCK AWARD AGREEMENT -------------------------------- Award Agreement, dated as of February 8, 1999 (the "Date of Grant") between POLICY MANAGEMENT SYSTEMS CORPORATION, a South Carolina corporation (the "Company"), and MICHAEL D. GANTT (the "Participant"). This Award Agreement is pursuant to the terms of the Company's Restricted Stock Ownership Plan (the "Plan"). The applicable terms of the Plan are incorporated herein by reference, including the definition of terms contained in the Plan. Section 1. Restricted Stock Award. The Company grants to the Participant, --------- ---------------------- on the terms and conditions hereinafter set forth, a Restricted Stock Award with respect to 849 SHARES of the Common Stock of the Company (the "Restricted Stock"). Section 2. Vesting of Restricted Stock. Subject to Sections 3 and 4 hereof, - ---------- ----------------------------- the Restricted Stock Award will vest and become payable over a five (5) year period in 20 percent increments, with the vesting dates being January 1 of each of the five calendar years following the year in which the Award is made, provided that the Participant remains as an Employee of the Company on each such date. Section 3. Termination of Employment. If the Participant's --------- ------------------------- employment is terminated by reason of Retirement, Disability or Death, all unvested shares of Restricted Stock shall become immediately vested and payable. In the event a Participant voluntarily terminates his employment with the Company prior to full vesting of any outstanding Award under the Plan, any unvested portion of such Award will be immediately forfeited. If the employment of a Participant is terminated by the Company for Cause prior to full vesting of any outstanding Award, any unvested portion of such Award will be immediately forfeited. If the employment of a Participant is terminated by the Company other than for Cause prior to full vesting of any outstanding Award: (I) any unvested portion of a Stock Uplift included in such Award will be immediately forfeited (applying the shares covered by the Stock Uplift on a pro-rata basis over the vesting period); and (ii) any unvested portion of the remainder of the Award shall be immediately vested and payable. Section 4. Change of Control. All shares of Restricted Stock shall ---------- ------------------- become fully and immediately vested and payable upon the occurrence of a Change of Control of the Company prior to any scheduled vesting date as provided in Section 2 hereof, provided that the Participant remains an Employee of the Company on the date of the Change in Control. Section 5. Rights as a Shareholder. Subject to the otherwise ---------- -------------------------- applicable provisions of the Plan and this Award Agreement, the Participant will have all rights of a shareholder with respect to shares of Restricted Stock granted to the Participant hereunder, including the right to vote the shares and receive all dividends and other distributions paid or made with respect thereto. Section 6. Restrictions on Transfer. Neither this Award nor any ---------- -------------------------- shares of the Restricted Stock covered hereby may be sold, assigned, transferred, encumbered, hypothecated or pledged by the Participant, otherwise than to the Company, unless as of the date of any such sale, assignment, transfer, encumbrance, hypothecation or pledge, such shares of Restricted Stock to be thus disposed of have become vested in accordance with this Award Agreement. Section 7. Award Subject to Plan. This Award and the Restricted ---------- --------------------- Stock acquired hereunder are subject to the Plan, the terms and provisions of which, as it may be amended from time to time, are hereby incorporated herein by reference. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the Plan will govern and prevail. Section 8. Tax Withholding. The Company's obligation to make payments --------- --------------- in respect of Restricted Stock is subject to the making of provision for the payment or withholding of any taxes from the participant required to be withheld pursuant to any applicable law in respect of the receipt or lapse of forfeiture restrictions with respect to such shares. Section 12.4 of the Plan sets forth provisions relating to tax withholding for Participants subject to Rule 16b-3 promulgated by the United States Securities and Exchange Commission pursuant to the Securities and Exchange Act of 1934. Section 9. Section 83(b) Election. The participant shall promptly --------- ---------------------- (and not later than 30 days of the date hereof) notify the Company if the Participant makes an election under Section 83(b) of the Internal Revenue Code. 1 Section 10. Changes in Common Stock. Any right hereunder in - - ----------- -------------------------- respect of the Company s Common Stock to which the Restricted Stock shall apply in the same respect to any other shares of stock of the Company into which the Common Stock has been exchanged or converted into, or which were issued in respect thereof, pursuant to any recapitalization or other event referred to in Section 3.2 of the Plan, as determined by the Committee in accordance with the Plan. Section 11. No Right of Employment. Nothing in this Award ----------- ------------------------- Agreement shall confer upon the Participant any right to continue as an Employee of the Company or to interfere in any way with the right of the Company or the shareholders of the Company to terminate the Participant's employment at any time. Section 12. Notices. Any notice hereunder by the Participant ----------- ------- shall be given to the Company in writing and such notice shall be deemed duly given only upon receipt thereof at the Company's office at One PMSC Center, Blythewood, South Carolina, 29016, or at such other address as the Company may designate by notice to the Participant. Any notice hereunder by the Company shall be given to the Participant in writing and such notice shall be deemed duly given only upon receipt thereof at such address as the Participant may have on file with the Company. Section 13. Construction. The Committee shall have the discretionary ----------- ------------ authority for the interpretation and construction of this Award Agreement, as and in the manner set forth in Section 4.2 of the Plan. Section 14. Governing Law. This Award Agreement shall be construed ----------- -------------- and enforced in accordance with the laws of the State of South Carolina, without giving effect to the choice of law principles thereof. POLICY MANAGEMENT SYSTEMS CORPORATION By: /s/ Stephen G. Morrison -------------------------- Name: Stephen G. Morrison Title: Executive Vice President, Secretary & General Counsel PARTICIPANT /s/ Michael D. Gantt -------------------- Name: Michael D. Gantt EX-10.44 8 POLICY MANAGEMENT SYSTEMS CORPORATION CHANGE IN CONTROL SEVERANCE PAY PLAN FOR SELECT EMPLOYEES 1. PURPOSE This Policy Management Systems Corporation Change in Control Severance Pay Plan for Select Employees has been established by the Company to provide for the payment of severance pay and benefits to Eligible Employees whose employment with the Company or any other Participating Employer terminates due to certain conditions created by a Change in Control of the Company. The purpose of the Plan is to assure a continuity in operations of the Company in the event of a Change in Control by allowing employees to focus on their responsibilities to the Company knowing that they have certain financial security in the event of their termination of employment. The accomplishment of this purpose is in the best interests of the Company and its shareholders. 2. DEFINITIONS The terms defined in this Section 2 shall have the meanings given below: a. "Annual Base Salary" means an Eligible Employee's gross annual base salary before any deductions, exclusions or any deferrals or contributions under any Participating Employer plan or program, but excluding bonuses, incentive awards, or compensation, employee benefits or any other non-salary form of compensation. b. "Board" means the Board of Directors of the Company. c. "Change in Control" has the meaning given in Section 3. d. "Code" means the Internal Revenue Code of 1986, as amended. e. "Committee" means the Compensation Committee of the Board, or such other committee appointed by the Board to perform the functions of the Committee under the Plan. f. "Covered Termination" has the meaning given in Section 6. g. "Company" means Policy Management Systems Corporation, a South Carolina corporation. h. "Eligible Employee" means any member of the management of the Company or any other Participating Employer who is designated by the Board from time to time as being eligible to participate in the Plan. i. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. j. "Exchange Act" means the Securities Exchange Act of 1934, as amended. k. "Participating Employer" has the meaning given in Section 4. l. "Plan" means this Policy Management Systems Corporation Change in Control Severance Pay Plan for Select Employees. m. "Severance Period" means the three (3) year period immediately following a Covered Termination. 3. CHANGE IN CONTROL For purposes of the Plan, a "Change in Control" means the occurrence of one of the following events: (a) any "person" (as such term is defined in Section 3 (a) (9) of the Exchange Act and as used in Sections 13 (d) (3) and 14 (d) (2) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 33 1/3% or more of the combined voting power of the Company's then outstanding securities eligible to vote for the election of the Board (the "Company Voting Securities"); provided, however, that the event described in this paragraph shall not be deemed to be a Change in Control by virtue of any of the following situations: (i) an acquisition by the Company of any of its subsidiaries; (ii) an acquisition by any employee benefit plan or employee stock plan sponsored or maintained by the Company or any of its subsidiaries or any trustee or fiduciary with respect to such plan; or (iii) an acquisition by any underwriter temporarily holding Company Voting Securities pursuant to an offering of such securities; (b) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority thereof; provided however, that any person becoming a director subsequent to the date hereof, whose election, or nomination for election, by the Company's shareholders was approved by a vote of at least two-thirds of the directors comprising the Incumbent Board who are then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this paragraph (b), considered as though such person were a member of the Incumbent Board, but excluding for this purpose any individual elected or nominated as a director of the Company as a result of any actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board; (c) the consummation of a merger, consolidation, share exchange or similar form of corporate reorganization of the Company or any of its subsidiaries that requires the approval of the Company's shareholders, whether for such transactions or the issuance of securities in connection with the transaction or otherwise (a "Business Combination"), unless (i) immediately following such Business Combination: (A) more than 50% of the total voting power of the corporation resulting from such Business Combination (the "Surviving Corporation") or, if applicable, the ultimate parent corporation which directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Company Voting Securities that were outstanding immediately prior to the Business Combination (or, if applicable, shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan or employee stock plan sponsored or maintained by the Surviving Corporation or Parent Corporation or any trustee or fiduciary with respect to any such plan) is or becomes the beneficial owner, directly or indirectly, of 33 1/3% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation), following the Business Combination, were members of the Incumbent Board at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination or (ii) the Business Combination is effected by means of the acquisition of Company Voting Securities from the Company, and prior to such acquisition a majority of the Incumbent Board approves a resolution providing expressly that such Business Combination does not constitute a Change in Control under this paragraph (c); or (d) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or the sale or other disposition of all or substantially all of the assets of the Company and its subsidiaries, other than a sale or disposition of assets to a subsidiary of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any person acquires beneficial ownership of more than 33 1/3% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which, by reducing the number of Company Voting Securities outstanding, increases the percentage of shares beneficially owned by such person; provided, that if a Change in Control would occur as a result of such an acquisition by the Company (if not for the operation of this sentence), and after the Company's acquisition such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control shall then occur. For purposes of this Section 3 only, the term "subsidiary" means a corporation of which the Company owns directly or indirectly 50% or more of the voting power. 4. PARTICIPATING EMPLOYERS The Company and each subsidiary corporation of which the Company owns directly or indirectly more than 50% of the voting power at the time of the Change in Control shall be Participating Employers under the Plan. In addition, the Committee may designate other affiliates of the Company as Participating Employers under the Plan, from time to time and under such terms and conditions as shall be specified by an action in writing by the Committee. Such terms and conditions may impose limitations on the extent to which any such affiliate participates in the Plan (including, but not limited to, the duration of any such participation), but shall not provide rights or benefits to Eligible Employees that are broader than those set forth in the Plan. Any entity that is a Participating Employer at the time of a Change in Control shall continue to be a Participating Employer following a Change in Control, and any person, firm or business that is a successor to the business or interests of a Participating Employer following a Change in Control shall be treated as a Participating Employer under the Plan. Notwithstanding the foregoing or anything elsewhere in the Plan to the contrary, the Committee shall have the discretionary authority, as specified below, to exclude from participation or limit the participation of any Participating Employer with respect to its Eligible Employees employed outside of the United States. The Committee shall exercise this authority only by an action in writing taken prior to a Change in Control on the basis of a good faith determination that, as a result of the specific effect of applicable local law or practice with respect to the Plan, it would be in the best interests of the Company to so exclude or limit such participation. In addition, to the extent specified by an action in writing prior to a Change in Control, the Committee may offset the benefits provided under the Plan to any such Eligible Employee by benefits under severance arrangements that exist by reason of applicable local law or practice. 5. ELIGIBLE EMPLOYEES All Eligible Employees shall participate in the Plan. Any person who is an Eligible Employee shall continue to be an Eligible Employee notwithstanding any change in his/her position or classification following a Change in Control. 6. COVERED TERMINATIONS An Eligible Employee shall be treated as having suffered a "Covered Termination" hereunder if his/her employment is terminated at any time within two (2) years following the date of a Change in Control, by reason of termination of employment by a Participating Employer without "Cause" or by the Eligible Employee for "Good Reason." An Eligible Employee shall not be treated as having suffered a Covered Termination in the event of his/her death, total disability (within the meaning of the Company's Long Term Disability Coverage), transfer of employment among Participating Employers (unless such transfer gives rise to a "Good Reason") or involuntary termination for "Cause." A termination of an Eligible Employee's employment hereunder by a Participating Employer shall be deemed to have occurred "For Cause" if, within a reasonable period after such termination, a good-faith finding shall be made by a majority of the Board that such termination occurred as a result of any of the following: (i) any act committed by an Eligible Employee which shall represent a breach in any material respect of any of the terms of the Eligible Employee's employment and which breach is not cured within 30 days of receipt by the Eligible Employee of written notice from a Participating Employer of such breach; (ii) improper conduct, consisting of any willful act or omission with the intent of obtaining, to the material detriment of a Participating Employer, any benefit to which an Eligible Employee would not otherwise be entitled; (iii) improper conduct consisting of sexual harassment or act of moral turpitude; (iv) gross negligence, consisting of wanton and reckless acts or omissions in the performance of an Eligible Employee's duties to the material detriment of a Participating Employer; (v) bad faith in the performance of an Eligible Employee's duties, consisting of willful acts or omissions, to the material detriment of a Participating Employer, including excessive unexcused absence from work; (vi) use of illegal drugs or unauthorized use of alcohol in the workplace or being under the influence of illegal drugs or alcohol while at work; or (vii) any conviction of, or plea of nolo contendere to, a crime (other ---- ---------- than a traffic violation) that constitutes a felony under the laws of the United States or any political subdivision thereof. A Participating Employer shall provide written notice to an Eligible Employee, within a reasonable time period, that the Board is convening for purposes of determining whether an Eligible Employee's termination of employment was For Cause and an Eligible Employee (or his representative) shall have the right to appear before the Board in connection with such determination. The employment of an Eligible Employee shall be deemed to have been terminated "For Good Reason" upon termination of employment by an Eligible Employee following a "constructive termination event," subject to the provisions below. For purposes hereof, the following shall constitute constructive termination events: (i) any reduction of an Eligible Employee's salary or failure to increase an Eligible Employee's salary each year for two consecutive years by 5% or, the greater of the change in the Consumer Price Index between January 1 and December 31 of the next preceding year; (ii) failure to pay an annual bonus to an Eligible Employee for each calendar year that ends after a Change in Control in an amount representing a percentage of the Eligible Employee's salary at least as great as the average of the respective percentages of the Eligible Employee's salary represented by the Eligible Employee's bonuses for the three most recent calendar years before a Change in Control (with any such calendar years during which no bonus was paid to be counted as 0% years); (iii) a material reduction from pre-Change in Control levels in an Eligible Employee's employee benefits and perquisites (other than incentive and bonus plans which are covered above), unless a Participating Employer provides a substitute benefit that is at least as favorable on an after-tax basis; (iv) a material reduction in an Eligible Employee's title, position, reporting relationship, responsibilities or authority; and (v) a relocation of an Eligible Employee's office by more than 35 miles that increases the Eligible Employee's travel distances from home. An event described above as a constructive termination event shall be treated as a constructive termination event hereunder following the expiration of 30 days from the date an Eligible Employee has notified a Participating Employer of the occurrence of such event and his intention to treat such event as a constructive termination event and terminate his employment on the basis thereof, provided that a Participating Employer has not cured the constructive termination event before the expiration of such 30-day period. Any notice given by an Eligible Employee under this paragraph shall be effective only if given to a Participating Employer in writing within 45 days after the event in question. 7. SEVERANCE PAYMENT The amount of the severance payment to be received by an Eligible Employee whose employment is terminated under conditions constituting a Covered Termination shall equal three (3) times the sum of: i. the Eligible Employee's Annual Base Salary at the time of Covered Termination (calculated without regard to any reduction in Annual Base Salary that results in a Good Reason termination) or, if greater, at the time of the Change in Control, plus ii the greater of (i) the amount of the Eligible Employee's target incentive bonus for the year of Covered Termination or (ii) the amount of the Eligible Employee's incentive bonus earned for the year immediately prior to the Change in Control. The severance payment to be made shall be paid to the Eligible Employee in a single lump sum cash payment, net of any required tax withholding, within fifteen (15) calendar days after the date of the Eligible Employee's Covered Termination. Any payment required under this Section 7 or any other provision of the Plan that is not made in a timely manner shall bear interest at a rate equal to one (1) percent above the prime rate, as published in The Wall Street --------------- Journal,. as in effect from time to time. ------ 8. OTHER SEVERANCE BENEFITS In addition to the severance payment provided under Section 7, an Eligible Employee shall be entitled to the following benefits and other rights in the event of his/her Covered Termination: a. The Eligible Employee shall be entitled to continued coverage and benefits for the duration of the Severance Period, at the Company's expense, under all employee welfare benefit plans (including, without limitation, medical, dental, group life, death benefit, dependent life, supplemental life, accidental death and dismemberment, short-term disability and long-term disability plans, health care reimbursement account and dependent day care reimbursement account) of Participating Employer for which he/she was eligible at the time of Covered Termination or, if it would provide benefit coverages more favorable to the Eligible Employee, at the time of the Change in Control, as though his/her termination of employment had not occurred (the "Welfare Continuation Coverages"). All Welfare Continuation Coverages shall apply to the Eligible Employee and any of his/her dependents who would have been eligible for coverage if the Eligible Employee remained employed for the applicable Severance Period. The Company may provide the Eligible Employee with the Welfare Continuation Coverages under arrangements other than its generally applicable welfare benefits plans, provided that the benefit coverages so provided are at least as favorable to the Eligible Employee as coverage under the otherwise applicable Welfare Continuation Coverages, on a coverage by coverage basis, and taking into account all tax consequences to the Eligible Employee. At the expiration of the applicable Severance Period, the Eligible Employee shall be treated as a then terminating employee with respect to the right to elect continued medical and dental coverages in accordance with section 4980B of the Code (or any successor provision thereto). b. Immediately upon a Covered Termination, any stock options or similar equity-based incentive rights granted to the Eligible Employee under a stock incentive plan of a Participating Employer that are not then fully vested and exercisable shall become fully vested and immediately exercisable and the Eligible Employee shall be entitled to exercise any such rights for the longest exercise period that could be granted to the Eligible Employee under the terms of such plan. The provisions of this paragraph (b) shall apply equally to any awards or rights into which the equity incentive rights described herein are converted or for which such rights are substituted in connection with a Change in Control. c. The Eligible Employee shall be entitled to the following payments and benefits in respect of accrued compensation rights at the time of a Covered Termination, in addition to all other rights provided under the Plan: (i) immediate payment of any accrued but unpaid Annual Base Salary through the date of Covered Termination; (ii) payment within fifteen (15) calendar days of Covered Termination of the accrued bonus for the year in effect on the date of the Covered Termination, determined on the basis of the bonus earned under terms of the applicable bonus plan through the date of termination, or, if greater, the pro-rata amount of the target bonus for the period of such year through the date of termination; (iii) payment within fifteen (15) calendar days of Covered Termination of all non-tax-qualified deferred compensation rights, if any, in lieu of payment in respect of such rights that would otherwise be made at a later date in accordance with the terms of such arrangements, except to the extent such rights are funded by amounts held under an irrevocable grant or trust or other irrevocable commitment of funds by the Company; and (iv) all benefits and rights accrued under the employee benefit plans, fringe benefit programs and payroll practices of a Participating Employer (other than those described in clause (iii) above) in accordance with their terms (including, without limitation, employee pension, employee welfare, incentive bonus and stock incentive plans). d. The Eligible Employee shall be provided, at the Company's sole expense, with professional outplacement services selected by the Eligible Employee consistent with his/her duties of profession and of a type and level customary for persons in his/her position; provided, however, that the Company shall not -------- ------- be required to pay fees in connection with the foregoing in an amount greater than fifteen (15) percent of the Eligible Employee's Annual Base Salary for purposes of item (i) of Section 7. e. With respect to any Eligible Employee who is, immediately prior to a Change in Control or a Covered Termination, indemnified by the Company for his/her service as a director, officer or employee of a Participating Employer, the Company shall indemnify such Eligible Employee to the fullest extent permitted by applicable law, and the Company shall maintain in full force and effect, for the duration of all applicable statute of limitation periods, insurance policies at least as favorable to the Eligible Employee as those maintained by the Company for the benefit of its directors and officers at the time of Change in Control, with respect to all costs, charges and expenses whatsoever (including payment of expenses in advance of final disposition of a proceeding) incurred or sustained by the Eligible Employee in connection with any action, suit or proceeding to which he/she may be made a party by reason of being or having been a director, officer or employee of a Participating Employer or serving or having served any other enterprise as a director, officer or employee at the request of a Participating Employer. 9. POTENTIAL EXCISE TAXES In the event it shall be determined that any payment or distribution by the Company or any other person or entity to or for the benefit of an Eligible Employee who suffers a Covered Termination is a "parachute payment" within the meaning of section 280G of the Code, whether paid or payable or distributed or distributable pursuant to the terms of this Plan or otherwise, or whether prior to or following the Covered Termination, in connection with, or arising out of, his/her employment with a Participating Employer or a change in ownership or effective control of the Company or a substantial portion of its assets (a "Payment"), and would be subject to the excise tax imposed by section 4999 of the Code (the "Excise Tax"), concurrent with the making of such Payment, the Company shall pay to the Eligible Employee an additional payment (the "Gross-Up Payment") in an amount such that the net amount retained by the Eligible Employee, after deduction of any Excise Tax on such Payment and any federal, state or local income tax and Excise Tax on the Gross-Up Payment shall equal the amount of such Payment. In the event the Internal Revenue Service subsequently may assess or seek to assess from the Eligible Employee an amount of Excise Tax in excess of that determined in accordance with the foregoing, the Company shall pay to the Eligible Employee an additional Gross-Up Payment, calculated as described above in respect of such excess Excise Tax, including a Gross-Up Payment in respect of any interest or penalties imposed by the Internal Revenue Service with respect to such excess Excise Tax. 10. NO MITIGATION OR OFFSET An Eligible Employee shall be under no obligation to minimize or mitigate damages by seeking other employment, and the obtaining of any such other employment shall in no event effect any reduction of the Company's obligation to make the payments and provide the benefits required under the Plan. In addition, the Company's obligation to make the payments and provide the benefits required under the Plan shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other rights which a Participating Employer may have against an Eligible Employee. 11. UNFUNDED STATUS The Plan is intended to constitute an unfunded employee benefit plan and shall be interpreted and administered accordingly. The payments and benefits provided hereunder shall be paid from the general assets of the Company. Nothing herein shall be construed to require the Company to maintain any fund or to segregate any amount for the benefit of any employee, and no employee or other person shall have any right against, right to, or security or other interest in any fund, account or asset of the Company from which the payment pursuant to the Plan may be made. Consistent with the foregoing, the Company may, in its sole discretion, deposit funds in a grantor trust or otherwise establish arrangements to pay amounts that become due under the Plan, and, notwithstanding anything elsewhere in the Plan to the contrary, the payments and benefits due under the Plan shall be reduced to reflect the amount of any payment made in respect of any Eligible Employee from a grantor trust or other arrangement established for this purpose. 12. ADMINISTRATION The Committee shall be named fiduciary of the Plan and the plan administrator for purposes of ERISA. The Committee shall be responsible for the overall operation of the Plan and shall have the fiduciary responsibility for the general operation of the Plan. The Committee may allocate to any one or more of the Company's employees any responsibility the Committee may have under the Plan and may designate any other person or persons to carry out any of the Committee's responsibilities under the Plan. As plan administrator, the Committee shall maintain records pursuant to the Plan's provisions and shall be responsible for the handling, processing and payment of any claims for benefits under the Plan. 13. CLAIMS AND DISPUTES Within fifteen (15) calendar days of a Covered Termination, the Company shall notify each Eligible Employee whom the Company determines is entitled to payments and benefits under the Plan of his/her entitlement to such payments and benefits. An Eligible Employee who is not so notified may submit a claim for payments and benefits under the Plan in writing to the Company within ninety (90) calendar days after becoming entitled to such benefits as described in Section 6. All such claims shall be approved or denied in writing by the Company within fifteen (15) calendar days after submission. Any denial of a claim by the Company shall be in writing and shall include: (i) the reason or reasons for the denial; (ii) reference to the pertinent Plan provisions on which the denial is based; (iii) a description of any additional material or information necessary for the Eligible Employee to perfect the claim together with an explanation of why the material or information is necessary; and (iv) an explanation of the Plan's claim review procedure, described below. An Eligible Employee shall have a reasonable opportunity to appeal a denied claim to the Company for a full and fair review. The Eligible Employee or authorized representative shall have sixty (60) calendar days after receipt of written notification of the denial of claim in which to request a review and to review pertinent documents of the Plan. The Company shall notify the Eligible Employee or his/her authorized representative of the time and place for the claim review. The Company shall issue a decision on the reviewed claim promptly, but no later than fifteen (15) calendar days after receipt of the request for review. The Company's decision shall be in writing and shall include: (i) the reasons for the decision, and (ii) references to the Plan provisions on which the decision is based. If the Eligible Employee shall dispute the Company's final decision, the dispute shall be submitted to an arbitration proceeding, conducted before a panel of three arbitrators, in accordance with the rules of the American Arbitration Association (or such other organization selected by mutual agreement of the Company and the Eligible Employee). Such arbitration shall take place in the location most practicably proximate to the Eligible Employee's principal workplace. Judgment may be entered on the arbitrators' award in any court having jurisdiction. Notwithstanding the foregoing, if an Eligible Employee believes the claims procedure or dispute resolution mechanism provided under this Section 13 would be futile or would cause such Eligible Employee irreparable harm, the Eligible Employee may, in his/her sole discretion, elect to enforce his/her rights under the Plan pursuant to section 502 of ERISA. The Company shall bear the expense of any enforcement proceeding brought by an Eligible Employee under the Plan and shall reimburse the Eligible Employee for all of his/her reasonable costs and expenses relating to such enforcement proceedings, including, without limitation, reasonable attorneys' fees and expenses, provided that the Eligible Employee is the prevailing party in such proceeding. For the purposes hereof, the trier of fact in such enforcement proceeding shall be requested to make a determination as to the reimbursement of the Eligible Employee's costs and expenses as a prevailing party hereunder. In no event shall the Eligible Employee be required to reimburse the Company for any of the costs or expenses relating to such enforcement proceeding. 14. TERM AND AMENDMENT The Plan shall become effective on the date of its adoption by the Board (the "Effective Date") and shall continue to be effective until the "Expiration Date." The Expiration Date shall initially be the third anniversary of the Effective Date, but as of the first anniversary of the Effective Date and each anniversary date thereafter, the Expiration Date shall be extended by an additional one (1) year unless, not later than ninety (90) calendar days prior to the respective anniversary date of the Effective Date, the Board shall specify by resolution or other written action that the Expiration Date shall not be so extended. Notwithstanding the foregoing, in the event of a Change in Control, the Plan shall continue in effect, and the Expiration Date shall not occur, until the satisfaction of all severance payments and benefits to which Eligible Employees are or may become entitled to under the Plan. The Board shall have the right, by resolution or other written action, to terminate the Plan, amend the Plan or to add or delete Eligible Employees; provided, however, -------- ------- that no such termination, amendment or deletion of an Eligible Employee by the Board shall be effective (i) if taken after a Change in Control, or (ii) to reduce the rights or benefits of any Eligible Employee if such action was taken within 6 months prior to a Change in Control or was taken in anticipation of or in connection with a Change in Control. 15. SUCCESSORS AND ASSIGNS The Plan shall be binding upon any person, firm or business that is a successor to the business or interests of the Company, whether as a result of a Change in Control of the Company or otherwise. All payments and benefits that become due to an Eligible Employee under the Plan shall inure to the benefit of his/her heirs, assigns, designees or legal representatives. 16. ENFORCEABILITY The Company intends the Plan to constitute a legally enforceable obligation between it and each Eligible Employee, and that the Plan confer vested rights on each Eligible Employee in accordance with the terms of the Plan, with each Eligible Employee being a third-party beneficiary thereof. Nothing in the Plan, however, shall be construed to confer on any Eligible Employee any right to continue in the employ of a Participating Employer or affect the right of a Participating Employer to terminate the employment or change the terms and conditions of employment of an Eligible Employee, with or without notice or cause, prior to a Change in Control, or to take any such action following a Change in Control, subject to the consequences specified by the Plan. The Plan shall be construed and enforced in accordance with ERISA and the laws of the State of South Carolina to the extent not preempted by ERISA, regardless of the law that might otherwise govern under applicable principles or provisions of choice or conflict of law doctrines. To the extent any provision of the Plan shall be invalid or unenforceable under any applicable law, it shall be considered deleted herefrom and all other provisions of the Plan shall be unaffected and shall continue in full force and effect. POLICY MANAGEMENT SYSTEMS CORPORATION SCHEDULE OF PARTICULARS FOR NAMED EXECUTIVE OFFICERS RE: CHANGE IN CONTROL SEVERANCE PAY PLAN NAMED EXECUTIVE EFFECTIVE DATE OF OFFICER PARTICIPATION Michael D. Gantt October 22, 1996 Harald J. Karlsen February 7, 2000 EX-10.45 9 EXECUTION COPY TERM LOAN AGREEMENT DATED AS OF NOVEMBER 5, 1999 AMONG POLICY MANAGEMENT SYSTEMS CORPORATION, THE GUARANTORS PARTY HERETO, BANK OF AMERICA, N.A. AS AGENT, AND THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO TABLE OF CONTENTS Section Page - ------- ---- ARTICLE 1 1.1 Definitions 1 1.2 Accounting Terms and Determinations 16 ARTICLE 2 2.1 Commitments to Lend 17 2.2 Procedure for Committed Borrowing 17 2.3 Notes 18 2.4 Conversion and Continuation Elections 19 2.7 Maturity of Loans 21 2.8 Interest Rates 21 2.9 Fees 22 2.10 Optional Termination or Reduction of Commitments 22 2.11 Mandatory Termination of Commitments 22 2.12 Optional Prepayments 22 2.13 General Provisions as to Payments 23 2.14 Funding Losses 24 2.15 Computation of Interest and Fees 24 2.16 Regulation D Compensation 24 ARTICLE 3 3.1 Closing 26 3.2 Borrowings 27 ARTICLE 4 4.1 General Representations 28 4.2 Full Disclosure 28 4.3 Representations of Guarantors 29 ARTICLE 5 5.1 Information 31 5.2 Payment of Obligations 31 5.3 Maintenance of Property; Insurance 31 5.4 Conduct of Business and Maintenance of Existence 31 5.5 Compliance with Laws 31 5.6 Inspection of Property, Books and Records 31 5.7 Mergers and Sales of Assets 31 5.8 Use of Proceeds 31 5.9 Negative Pledge 31 5.10 Limitation on Debt of Subsidiaries 31 5.11 Leverage Ratio 31 5.12 Minimum Consolidated Tangible Net Worth 31 5.13 Restricted Payments 31 5.14 Investments 31 5.15 Transactions with Affiliates 31 5.16 Additional Guarantors 31 5.17 Limitation on Non-Cash Charges 31 ARTICLE 6 6.1 Events of Default 31 6.2 Notice of Default 31 ARTICLE 7 7.1 Appointment and Authorization; "Agent". 31 7.2 Delegation of Duties 31 7.3 Liability of Agent 31 7.4 Reliance by Agent 31 7.5 Notice of Default 31 7.6 Credit Decision 31 7.7 Indemnification of Agent 31 7.8 Agent in Individual Capacity 31 7.9 Successor Agent 31 ARTICLE 8 8.1 Basis for Determining Interest Rate Inadequate or Unfair 31 8.2 Illegality 31 8.3 Increased Cost and Reduced Return 31 8.4 Taxes 31 8.5 Base Rate Loans Substituted for Affected Euro-Dollar Rate Loans 31 ARTICLE 9 9.1 The Guaranty 31 9.2 Guaranty Unconditional 31 9.3 Discharge Only Upon Payment In Full; Reinstatement In Certain Circumstances 31 9.4 Waiver by each Guarantor 31 9.5 Subrogation and Contribution 31 9.6 Stay of Acceleration 31 9.7 Limit of Liability 31 ARTICLE 10 10.1 Notices 31 10.2 No Waivers 31 10.3 Costs and Expenses 31 10.4 Sharing of Set-Offs 31 10.5 Amendments and Waivers 31 10.6 Successors and Assigns 31 10.7 Collateral 31 10.8 Governing Law; Submission to Jurisdiction 31 10.9 Counterparts; Integration; Effectiveness 31 10.10 WAIVER OF JURY TRIAL 31 10.11 Confidentiality 31 SCHEDULES Schedule 5.3 Insurance Schedule 10.1 Addresses for Notices to Borrower and Agent EXHIBITS Exhibit A Note Exhibit B Form of Notice of Borrowing Exhibit C Form of Notice of Conversion/Continuation Exhibit D Form of Opinion of Office of General Counsel to Obligors Exhibit E Form of Compliance Certificate Exhibit F Form of Auditor's Statement Exhibit G Form of Assignment and Assumption Agreement TERM LOAN AGREEMENT TERM LOAN AGREEMENT dated as of November 5, 1999 among POLICY MANAGEMENT SYSTEMS CORPORATION, the GUARANTORS party hereto, the BANKS listed on the signature pages hereof and BANK OF AMERICA, N.A., as Agent. The parties hereto agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.1 Definitions. The following terms, as used herein, have the ----------- following meanings: "Administrative Questionnaire" means, with respect to each Bank, an ---------------------------- administrative questionnaire in the form prepared by the Agent and submitted to the Agent (with a copy to the Borrower) duly completed by such Bank. "Affiliate" means (i) any Person that directly, or indirectly through --------- one or more intermediaries, controls the Borrower (a "Controlling Person") or (ii) any Person (other than the Borrower or a Subsidiary) which is controlled by or is under common control with a Controlling Person. As used herein, the term "control" means possession, directly or indirectly, of the power to vote 25% or more of any class of voting securities of a Person or to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Agent" means BofA in its capacity as agent for the Banks hereunder, ----- and any successor agent arising under Section 7.9. "Agent-Related Persons" means BofA and any successor agent arising --------------------- under Section 7.9, together with their respective affiliates and the officers, directors, employees, agents and attorneys-in-fact of such Persons and affiliates. "Agent's Payment Office" means the address for payments set forth in ---------------------- the signature pages hereto or such other address as the Agent may from time to time specify. "Applicable Lending Office" means, with respect to any Bank, (i) in ------------------------- the case of its Base Rate Loans, its Domestic Lending Office and (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office. "Assignee" has the meaning set forth in Section 10.6(c). -------- "Attorney Costs" means and includes all fees and disbursements of any -------------- law firm or other external counsel and the allocated cost of internal legal services and all disbursements of internal counsel; provided that in determining -------- ---- Attorney Costs associated with any matter, there is no duplication of legal services in respect of such matter by external counsel and internal counsel. "Bank" means each financial institution listed on the signature pages ---- hereof under the caption "Banks", each Assignee which becomes a Bank pursuant to Section 10.6(c), and their respective successors. "Base Rate" means, for any day, a rate per annum equal to the higher --------- of (i) the arithmetic mean of the Prime Rates of each of the Reference Banks (rounded upward to the nearest 1/16 of 1%) for such day as notified by the Reference Banks to the Agent on such day or (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Base Rate Loan" means a Loan that bears interest based on the Base -------------- Rate. "Benefit Arrangement" means at any time an employee benefit plan ------------------- within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "BofA" means Bank of America, N.A. ---- "Borrower" means Policy Management Systems Corporation, a South -------- Carolina corporation, and its successors. "Borrowing" means a borrowing hereunder consisting of Loans of the --------- same Type made to the Borrower on the same day by the Banks under Article 2, and having the same Interest Period. "Business Day" means any day other than a Saturday, Sunday or other ------------ day on which commercial banks in New York City or San Francisco are authorized or required by law to close and, if the applicable Business Day relates to any Euro-Dollar Loan, means such a day on which dealings are carried on in the applicable offshore dollar interbank market. "Capital Expenditures" means, for any period, on a consolidated basis -------------------- for the Borrower and its Consolidated Subsidiaries, the aggregate of all expenditures (whether paid in cash or accrued as liabilities during that period and including that portion of capital leases (except any capitalized interest) which is capi-talized on the consolidated balance sheet of the Borrower and its Subsidiaries) made by the Borrower or any Consolidated Subsidiary during such period that, in conformity with generally accepted accounting principles, are required to be included in or reflected by property, plant or equip-ment, licenses and permits, or other similar fixed asset accounts as reflected in such balance sheet (including expenditures for equipment purchased simul-taneously with the trade-in of existing equipment owned by the Borrower or any such Subsidiary to the extent the gross amount of such purchase price exceeds the book value of the equipment being traded in, but excluding expenditures made in connection with the replacement or restoration of assets, to the extent reim-bursed or financed from insurance proceeds or condemnation awards). "Closing Date" means the date on or after the Effective Date on which ------------ the Agent shall have received the documents specified in or pursuant to Section 3.1. "Commitment" means, with respect to each Bank, the amount set forth ---------- opposite the name of such Bank on the signature pages hereof, as such amount may be reduced from time to time pursuant to Section 2.8. "Consolidated Capitalization" means, as at any date of determination, --------------------------- the sum of Consolidated Funded Debt at such date and Total Shareholders' Equity at such date. "Consolidated Adjusted Cash Flow" means, for any four consecutive ------------------------------- fiscal quarters of the Borrower, Consolidated Net Income for such period plus, ---- to the extent deducted in determining Consolidated Net Income, the aggregate amount of (i) Consolidated Interest Expense; (ii) income tax expense; and (iii) the amount of all amortization of intangibles and depreciation that were deducted in determining Consolidated Net Income for the period. "Consolidated Funded Debt" means all Debt of the Borrower and the ------------------------ Consolidated Subsidiaries for borrowed money. "Consolidated Interest Expense" means, for any fiscal period, the ----------------------------- interest expense of the Borrower and its Consolidated Subsidiaries (whether expensed or capitalized) determined on a consolidated basis for such fiscal period. "Consolidated Net Income" means, for any four consecutive fiscal ----------------------- quarters of the Borrower, the net income of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis for such period, minus (i) any ----- extraordinary gain (but not extraordinary loss), other than any extraordinary gain as a result of the receipt of casualty proceeds for a casualty event with respect to which an extraordinary loss has been realized during such fiscal period or any prior fiscal period and (ii) to the extent not reflected in any extraordinary gain, any gain (a) as a result of an asset disposition (including without limitation any disposition of capital stock and any such disposition consisting of receipt of casualty proceeds with respect to any asset (except as a result of the receipt of casualty proceeds for a casualty event with respect to which a loss has been realized during such period or any prior fiscal period)), other than dispositions of inventory, marketable securities and services in the ordinary course of business, (b) as a result of the disposition of a separate business segment, (c) on restructuring payables or receivables, (d) on the extinguishment of debt, (e) as a result of a prior period adjustment, (f) as a result of an accounting change and (g) from discontinued operations (other than from the discontinuance of the businesses referred to in clause (iv) of the first proviso to Section 5.4); provided that, with respect to all of the -------- ---- foregoing provisions of this definition, if the aggregate of the Borrower's Investments in Subsidiaries that are not wholly-owned exceeds $15,000,000, then (x) the net income of any Subsidiary of the Borrower which is not a wholly-owned Subsidiary and for which the Borrower's Investment therein is accounted for with the equity method of accounting shall have its net income included in Consolidated Net Income of the Borrower only to the extent of the amount of cash dividends or distributions paid by such subsidiary to the Borrower during such period and (y) the net income of Software Consult Micado AG shall be included in the calculation of Consolidated Net Income. "Consolidated Subsidiary" means at any date any Subsidiary or other ----------------------- entity the accounts of which would be consolidated with those of the Borrower in its consolidated financial statements if such statements were prepared as of such date. "Consolidated Tangible Net Worth" means with respect to the Borrower ------------------------------- and its Consolidated Subsidiaries at a particular date, an amount equal to (i) Total Shareholders' Equity, less (ii) the aggregate amount of all items and assets categorized as intangibles, including but not limited to "goodwill", customer lists, contract acquisition costs, covenants not to compete and capitalized software costs, all as on the consolidated balance sheet of the Borrower as determined in accordance with generally accepted accounting principals. "Conversion/Continuation Date" means any date on which, under Section ---------------------------- 2.4, the Borrower (a) converts Loans of one Type to another Type, or (b) continues as Loans of the same Type, but with a new Interest Period, Loans having Interest Periods expiring on such date. "Debt" of any Person means at any date, without duplication, (i) all ---- obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except (x) trade accounts payable arising in the ordinary course of business and (y) any other accrued expenses incurred in the ordinary course of business, and (z) payment of amounts pursuant to a "contingent earn-out" or similar provisions the payment of which amounts is contingent upon the achievement of good faith performance targets, but only to the extent that such payment is not, or would not be, reflected as a liability on the balance sheet of such Person at such date, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all non-contingent obligations (and, for purposes of Section 5.9(a), (f) and (k) and the definitions of Material Debt and Material Financial Obligations, all contingent obligations) of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit, (vi) all obligations of such Person with respect to Designated Swaps, but only to the extent that such obligations are, or would be reflected as a liability on the balance sheet of such Person at such date, (vii) all Debt secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person and (viii) all Debt of others Guaranteed by such Person. It is understood that the payment obligations of the Borrower to a counterparty under any equity swap (each such swap, a "Designated Swap") to be entered into between the Borrower --------------- and such counterparty with respect to shares of outstanding common stock of the Borrower in connection with the Borrower's share repurchase program shall not constitute "Debt" except as set forth in clause (vi) of the definition of Debt. "Default" means any condition or event which constitutes an Event of ------- Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Defeased Debt" means the Loan Notes (the "Loan Notes") of PMSC ------------- ---------- Limited in the aggregate principal amount of 1,271,967 for which, as of the Closing Date, PMSC Limited has deployed the assets described in Section 5.9(i) to retire such Loan Notes and all related interest expense; but only so long as the Loan Notes are not reflected as Debt on the consolidated financial statements of the Borrower most recently delivered pursuant to Sections 4.4(b), 5.1(a) or (b), as the case may be. "Derivatives Obligations" of any Person means all obligations of such ----------------------- Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. "Disbursement Date" means November 5, 1999. ----------------- "Domestic Lending Office" means, as to each Bank, its office located ----------------------- at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Agent. "Effective Date" means the date this Agreement becomes effective in -------------- accordance with Section 10.9. "Environmental Laws" means any and all federal, state, local and ------------------ foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended, or any successor statute. "ERISA Group" means the Borrower, any Subsidiary and all members of a ----------- controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "Euro-Dollar Lending Office" means, as to each Bank, its office, -------------------------- branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Agent. "Euro-Dollar Loan" means any Loan that bears interest based on the ---------------- LIBO Rate. "Euro-Dollar Margin" means a rate per annum equal to 1.00%. ------------------ "Euro-Dollar Reserve Percentage" means for any day that percentage ------------------------------ (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of ------------------------ liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by , non-United States office of any Bank to United States residents). "Event of Default" has the meaning set forth in Section 6.1. ---------------- "Facility Fee Rate" has the meaning set forth in Section 2.7. ----------------- "Federal Funds Rate" means, for any day, the rate per annum (rounded ------------------ upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (i) if such day is not a Business Day, the -------- ---- Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (ii) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to BofA on such day on such transactions as determined by the Agent. "Guarantee" by any Person means any obligation, contingent or --------- otherwise, of such Person directly or indirectly guaranteeing any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take or pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the holder of such Debt of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include -------- ---- endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. --------- "Guarantor" means Cybertek Corporation, PMSC Limited, Policy --------- Management Systems Investments, Inc., The Leverage Group, Inc., and Cybertek Solutions, L.P. and each other Person who has executed this Agreement as a guarantor. "Hazardous Substances" means any toxic, radioactive, caustic or -------------------- otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics. "Indemnified Liabilities" means any and all liabilities, obligations, ----------------------- losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans and the termination, resignation or replacement of the Agent or replacement of any Bank) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Agreement or any document contemplated by or referred to herein, or the transactions contemplated hereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any insolvency proceeding or appellate proceeding) related to or arising out of this Agreement or the Loans or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto. "Indemnitee" has the meaning set forth in Section 10.3(c) ---------- "Interest Period" means as to any Euro-Dollar Loan, the period --------------- commencing on the Disbursement Date or on the Conversion/Continuation Date on which the Loan is converted into or continued as an Euro-Dollar Loan, and ending on the date one, two, three or six months thereafter as selected by the Borrower in its Notice of Borrowing, Notice of Conversion/Continuation as the case may be; (a) any Interest Period which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day; (b) any Interest Period which begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. "Internal Revenue Code" means the Internal Revenue Code of 1986, as --------------------- mended, or any successor statute. "Investment" means any investment in any Person, whether by means of ---------- share purchase, capital contribution, loan, Guarantee, time deposit or otherwise (but not including any demand deposit). "Leverage Ratio" means at any date the ratio of (i) Consolidated -------------- Funded Debt to (ii) Consolidated Adjusted Cash Flow minus Capital Expenditures. "LIBO Rate" means, for any Interest Period with respect to a --------- Euro-Dollar Loan the rate of interest per annum determined by the Agent to be the arithmetic mean (rounded upward to the nearest 1/16th of 1%) of the rates of interest per annum notified to the Agent by each Reference Bank as the rate of interest at which dollar deposits in the approximate amount of the Euro-Dollar Loan to be made by such Reference Bank, and having a maturity comparable to such Interest Period, would be offered to major banks in the London interbank market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period. "Lien" means, with respect to any asset, any mortgage, lien, pledge, ---- charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" means a Loan by a Bank to the Borrower under Section 2.1, and ---- may be a Euro-Dollar Loan or a Base Rate Loan (each, a "Type" of Loan). ---- "Material Debt" means Debt (other than the Notes and any loans solely ------------- between the Borrower and its Subsidiaries or between its Subsidiaries) of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, in an aggregate principal or face amount exceeding $20,000,000. "Material Financial Obligations" means a principal or face amount of ------------------------------ Debt and/or payment or collateralization obligations in respect of Derivatives Obligations of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, exceeding in the aggregate $20,000,000. "Material Plan" means at any time a Plan or Plans having aggregate ------------- Unfunded Liabilities in excess of $3,000,000. "Material Subsidiary" means, at any date, (i) any Subsidiary of the ------------------- Borrower whose total assets, total revenue or net income (or, in the case of a Subsidiary which has subsidiaries, consolidated total assets, total revenue or net income of such Subsidiary with its subsidiaries) are at least 5% of the consolidated total assets, total revenue or net income, respectively, of the Borrower and its Consolidated Subsidiaries (as shown on the consolidated financial statements of Borrower then most recently delivered) at or, as relevant, for the four consecutive fiscal quarters ended on or most recently prior to such date, (ii) any Subsidiary whose outstanding balance of Debt owed to the Borrower or any other Subsidiary (net of the aggregate amount of Debt owed to such Subsidiary by the Borrower or any other Subsidiary) exceeds $10,000,000 (as shown in the certificate of the Borrower listing its Material Subsidiaries then most recently delivered or (iii) any Subsidiary whose outstanding balance of Debt from the Borrower or any other Subsidiary (net of the aggregate amount of Debt owed by such Subsidiary by the Borrower or any other Subsidiary) exceeds $10,000,000 (as shown in the certificate of the Borrower listing its Material Subsidiaries then most recently delivered); provided that no foreign Subsidiary of the Borrower or of PMSC Limited shall be -- ---- deemed to be a Material Subsidiary. "Multiemployer Plan" means at any time an employee pension benefit ------------------ plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "Note" means a promissory note of the Borrower in substantially the ---- form of Exhibit A hereto. --------- "Notice of Borrowing" means a notice in substantially the form of ------------------- Exhibit B hereto. ----- "Notice of Conversion/Continuation" means a notice in substantially --------------------------------- the form of Exhibit C hereto. --------- "Obligor" means the Borrower and each Guarantor. ----- "Parent" means, with respect to any Bank, any Person controlling such ------ ----------- Bank. "Participant" has the meaning set forth in Section 10.6(b) ----------- "PBGC" means the Pension Benefit Guaranty Corporation or any entity ---- succeeding to any or all of its functions under ERISA. -------- "Person" means an individual, a corporation, a limited liability ------ company, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or --- instrumentality thereof. "Plan" means at any time an employee pension benefit plan (other than ---- a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "Prime Rate" means the rate of interest in effect for such day as ---------- publicly announced from time to time by the Banks as their "prime rate." (The ---- "prime rate" is a rate set by each Bank based upon various factors including its costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate.) "Pro Rata Share" means, as to any Bank at any time, the percentage -------------- equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Bank's Commitment divided by the combined Commitments of all Banks. "Reference Banks" means Bank of America, N.A., First Union National --------------- Bank and Wachovia Bank, N.A. "Regulation U" means Regulation U of the Board of Governors of the ------------ Federal Reserve System, as in effect from time to time. "Responsible Officer" means the chief executive officer or the ------------------- president of the Borrower, any other officer having substantially the same authority and responsibility, or the general counsel of the Borrower; or, with respect to compliance with financial covenants, the chief financial officer or the treasurer of the Borrower, or any other officer having substantially the same authority and responsibility. "Restricted Payment" means (i) any dividend or other distribution on ------------------ any shares of the Borrower's capital stock (except dividends payable solely in shares of its capital stock) or (ii) any payment on account of the purchase, redemption, retirement or acquisition of (a) any shares of the Borrower's capital stock or (b) any option, warrant or other right to acquire shares of the Borrower's capital stock (but not including payments of principal, premium (if any) or interest made pursuant to the terms of convertible debt securities prior to conversion). "Senior Bank Facility" means the Credit Agreement dated as of August 8, -------------------- 1997 among the Borrower, the financial institutions parties to such Credit Agreement and Bank of America, N.A. as agent, as amended by a First Amendment dated as of November 5, 1999. "Subsidiary" means, as to any Person, any corporation or other entity ---------- of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person or any other entity the management of which is directly or indirectly controlled by such Person; unless otherwise specified, "Subsidiary" means a Subsidiary of the ---------- Borrower. "Temporary Cash Investment" means any Investment in (i) direct ------------------------- obligations of the United States or any agency thereof or the Commonwealth of Australia, or obligations guaranteed by the United States or any agency thereof or the Commonwealth of Australia, (ii) commercial paper rated at least A-1 by Standard & Poor's Rating Group and P-l by Moody's Investors Service, Inc., (iii) time deposits with, including certificates of deposit issued by, any office located in the United States of (x) any Bank or (y) any bank or trust company which is organized under the laws of the United States or any state thereof or the United Kingdom and has capital, surplus and undivided profits aggregating at least $750,000,000, (iv) repurchase agreements with respect to securities described in clause (i) above entered into with an office of a bank or trust company meeting the criteria specified in clause (iii) above or (v) municipal bonds issued by municipalities located in the United States rated at least A or the equivalent thereof by Standard & Poor's Rating Group or A2 or the equivalent thereof by Moody's Investors Service, Inc. and, if such bonds are rated by both such agencies, then at least A or the equivalent thereof by Standard & Poor's Rating Group and A2 or the equivalent thereof by Moody's Investors Service, Inc.; and (vi) Debt securities of any Person which are rated at least A or the equivalent thereof by Standard & Poor's Rating Group or A2 or the equivalent -- thereof by Moody's Investors Service, Inc. and, if such Debt securities are rated by both such agencies, then at least A or the equivalent thereof by Standard & Poor's Rating Group and A2 or the equivalent thereof by Moody's --- Investors Service, Inc.; provided that any Investment described in clauses (i), -------- (ii), (iii) or (iv) matures within one year from the date of acquisition thereof by the Borrower or a Subsidiary and any Investment described in clause (vi) matures within 90 days from the date of acquisition thereof by the Borrower or a Subsidiary. "Termination Date" means July 15, 2000. ---------------- "Total Shareholders' Equity" means, as of any date of determination, -------------------------- the shareholders' equity at such date of the Borrower and its Consolidated Subsidiaries, as determined in accordance with generally accepted accounting principles. "Type" has the meaning specified in the definition of Loan. ---- "Unfunded Liabilities" means, with respect to any Plan at any time, -------------------- the amount (if any) by which (i) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "United States" means the United States of America, including the ------------- States and the District of Columbia, but excluding its territories and possessions. SECTION 1.2 Accounting Terms and Determinations. Unless otherwise ----------------------------------- specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks; provided that, if the Borrower notifies the Agent that the -------- ---- Borrower wishes to amend any covenant in Article 5 to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Agent notifies the Borrower that the Required Banks wish to amend Article 5 for such purpose), then the Borrower's compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted accounting principles became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Banks. ARTICLE 2 THE CREDIT SECTION 2.1 Commitments to Lend. Each Bank severally agrees, on the terms ------------------- and conditions set forth in this Agreement, to make loans to the Borrower on the Disbursement Date pursuant to this Section 2.1 in amounts such that (a) the aggregate principal amount of Loans by such Bank at any one time outstanding shall not exceed the amount of its Commitment and (b) after giving effect to the Borrowing, the aggregate amount of all outstanding Loans shall not exceed the combined Commitments of all the Banks. The Loans made by the Banks hereunder are not revolving and any amounts borrowed hereunder which are repaid or prepaid by the Borrower may not be reborrowed. SECTION 2.2 Procedure for Borrowing. ----------------------- (a) The Borrower shall give the Agent notice (a "Notice of --------- Borrowing") not later than 7:30 a.m. (San Francisco time) on (x) the -- Disbursement Date with respect to Base Rate Loans, (y) the third Business Day -- before the Disbursement Date with respect to Euro-Dollar Loans, specifying: (i) the requested Disbursement Date, which shall be a Business Day (ii) the aggregate amount of such Borrowing; (iii) whether the Loans comprising such Borrowing are to be, Base Rate Loans or Euro-Dollar Loans; and (iv) in the case of a Borrowing with respect to Euro-Dollar Loans, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. (b) Upon receipt of the Notice of Borrowing, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower, except pursuant to an election made by the Borrower as expressly permitted by the last sentence of Section 8.1. (c) Not later than 9:00 a.m. (San Francisco time) on the Disbursement Date, each Bank shall (except as provided in subsection (d) of this Section) make available its ratable share of such Borrowing, in Federal or other funds immediately available, to the Agent at its address referred to in Section 10.1. Unless the Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Agent will make the funds so received from the Banks available to the Borrower at the Agent's aforesaid address. (d) Unless the Agent shall have received notice from a Bank prior to the Disbursement Date that such Bank will not make available to the Agent such Bank's share of the Borrowing, the Agent may assume that such Bank has made such share available to the Agent on the date of such Borrowing in accordance with subsections (c) of this Section and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Agent, such Bank and the Borrower severally agree to repay to the Agent within three Business Days of demand therefor such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, a rate per annum equal to the higher of the Federal Funds Rate or the interest rate applicable thereto pursuant to Section 2.6 or (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. SECTION 2.3 Notes. ----- (a) The Loans of each Bank shall be evidenced by one or more notes (the Notes) payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to the aggregate unpaid principal amount of such Bank's Loans. (b) Each Bank may, by notice to the Borrower and the Agent, request that its Loans of a particular type be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of such Loans. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate --------- modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the "Note" of such Bank shall be ---- deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank's Note pursuant to Section 3.1(a), the Agent shall forward such Note to such Bank. Each Bank shall record the date, amount, type and maturity of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and may, if such Bank so elects in connection with any transfer or enforcement of its Note, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of any Bank to make any such recordation -------- ---- or endorsement shall not affect the obligations of the Borrower hereunder or under the Note. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. SECTION 2.4 Conversion and Continuation Elections. ------------------------------------- (a) The Borrower may, upon irrevocable written notice to the Agent in accordance with subsection 2.4(b): (i) elect, as of any Business Day, in the case of Base Rate Loans, or as of the last day of the applicable Interest Period, in the case of any other Type of Loans, to convert any such Loans (or any part thereof in an amount not less than $5,000,000, or that is in an integral multiple of $1,000,000 in excess thereof) into Loans of any other Type; or (ii) elect, as of the last day of the applicable Interest Period, to continue any Loans having Interest Periods expiring on such day (or any part thereof in an amount not less than $5,000,000, or that is in an integral multiple of $1,000,000 in excess thereof); provided, that if at any time the aggregate amount of Euro-Dollar Loans is - -------- reduced, by payment, prepayment, or conversion of part thereof to be less than - ----- $5,000,000, such Euro-Dollar Loans shall automatically convert into Base Rate Loans, and on and after such date the right of the Borrower to continue such Loans as, and convert such Loans into, Euro-Dollar Loans shall terminate. (b) The Borrower shall deliver a Notice of Conversion/Continuation to be received by the Agent not later than 7:30 a.m. (San Francisco time) at least (i) three Business Days in advance of the Conversion/Continuation Date, if the Loans are to be converted into or continued as Euro-Dollar Loans; and (ii) on the Conversion/Continuation Date, if the Loans are to be converted into Base Rate Loans, specifying: (A) the proposed Conversion/Continuation Date; (B) the aggregate amount of Loans to be continued or converted; (C) the Type of Loans resulting from the proposed conversion or continuation; and (D) other than in the case of conversions into Base Rate Loans, the duration of the requested Interest Period. (c) If upon the expiration of any Interest Period applicable to Euro-Dollar Loans, the Borrower has failed to select timely a new Interest Period to be applicable to such Euro-Dollar Loans, or if any Default or Event of Default then exists, the Borrower shall be deemed to have elected to convert such Euro-Dollar Loans into Base Rate Loans effective as of the expiration date of such Interest Period. (d) The Agent will promptly notify each Bank of its receipt of a Notice of Conversion/Continuation, or, if no timely notice is provided by the Borrower, the Agent will promptly notify each Bank of the details of any automatic conversion. All conversions and continuations shall be made ratably according to the respective outstanding principal amounts of the Loans with respect to which the notice was given held by each Bank. (e) Unless the Banks otherwise consent, during the existence of a Default or Event of Default, the Borrower may not elect to have a Loan converted into or continued as an Euro-Dollar Loan. SECTION 2.5 Maturity of Loans. The Borrower shall repay to the Banks on ----------------- the Termination Date the aggregate principal amount of Loans outstanding on such date. SECTION 2.6 Interest Rates. -------------- (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable on the last day of each calendar quarter. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate Loans for such day. (b) Each Euro-Dollar Rate Loan shall bear interest on the outstanding principal amount thereof, for each day during the Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the LIBO Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. (c) Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the higher of (i) the sum of 2% plus the Euro-Dollar Margin for such day plus the LIBO Rate applicable to the Interest Period for such Loan or (ii) the sum of 2% plus the Euro-Dollar Margin for such day plus the LIBO Rate (or, if the circumstances described in clause (a) or (b) of Section 8.1 shall exist, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day). (d) The Agent shall determine each interest rate applicable to the Loans hereunder. The Agent shall give prompt notice to the Borrower and the participating Banks of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of error. SECTION 2.7 Fees. On the Closing Date, the Borrower shall pay to the ---- Agent for the account of the Banks ratably a one-time fee on the aggregate amount of the Commitments equal to 0.15%. SECTION 2.8 Optional Termination or Reduction of Commitments. Prior to ------------------------------------------------ the Disbursement Date, the Borrower may, upon at least three Business Days' notice to the Agent, (i) terminate the Commitments at any time, if no Loans are outstanding at such time or (ii) ratably reduce from time to time by an aggregate amount of $5,000,000 or a larger multiple of $1,000,000, the aggregate amount of the Commitments in excess of the aggregate outstanding principal amount of the Loans. SECTION 2.9 Mandatory Termination of Commitments and Mandatory -------------------------------------------------- Prepayments. - (a) The Commitments shall automatically terminate at the close of business on the Disbursement Date. (b) The Company shall repay the Loans on the Termination Date. (c) If the Borrower shall issue for cash any additional equity (other than in connection with the exercise of options, or the issuance of equity in connection with employee benefit plans, or a contribution to the Borrower in connection with a vendor agreement to fund a specific development and marketing effort or to fund one or more specific acquisitions set forth in the vendor agreement or a technology transfer agreement) or incur Debt for cash, the Borrower shall promptly notify the Agent of the estimated net proceeds of such issuance to be received by the Borrower. Promptly upon, and in no event later than three Business Days after receipt by the Borrower of the net cash proceeds of such issuance, the Borrower shall prepay the Term Loan in an aggregate amount equal to the amount of net proceeds until the Term Loan shall be repaid in full. SECTION 2.10 Optional Prepayments. -------------------- (a) Subject in the case of any Euro-Dollar Borrowing to Section 2.12, the Borrower may, upon at least one Business Day's notice to the Agent, prepay any Base Rate Loan or upon at least three Business Days' notice to the Agent, prepay any Euro-Dollar Loan, in each case in whole at any time, or from time to time in part in amounts aggregating $5,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Borrowing. (b) Upon receipt of a notice of prepayment pursuant to this Section, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share of such prepayment and such notice shall not thereafter be revocable by the Borrower. SECTION 2.11 General Provisions as to Payments. --------------------------------- (a) Borrower shall make such payment of principal of, and interest on, the Loans and of fees hereunder, not later than 9:00 a.m. (San Francisco time) on the date when due, in Federal or other funds immediately available, to the Agent at its address referred to in Section 10.1. The Agent will promptly distribute to each Bank its ratable share of each such payment received by the Agent for the account of the Banks. If any payment of principal of, or interest on, the Loans (other than Euro-Dollar Loans) or of fees shall be due on a day which is not a Business Day, the date for payment thereof shall be extended to the next succeeding Business Day. If any payment of principal of, or interest on, a Euro-Dollar Loan shall be due on a day which is not a Business Day, the date for payment thereof shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at the Federal Funds Rate. SECTION 2.12 Funding Losses. If the Borrower makes any payment of -------------- principal with respect to any Euro-Dollar Loan (pursuant to Article 2, 6 or 8 or otherwise) on any day other than the last day of the Interest Period applicable thereto, or if the Borrower fails to borrow, prepay, convert or continue any Euro-Dollar Loans after notice has been given to any Bank in accordance with Section 2.2(b) or 2.4, the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or failure to borrow or prepay, provided that such Bank shall have delivered to the -------- ---- Borrower a certificate detailing the calculation by such Bank as to the amount of such loss or expense, which certificate shall be conclusive in the absence of error. SECTION 2.13 Computation of Interest and Fees. Interest based on the -------------------------------- Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). SECTION 2.14 Regulation D Compensation. Each Bank may require the ------------------------- Borrower to pay, contemporaneously with each payment of interest on the Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such Bank at a rate per annum determined by such Bank up to but not exceeding the excess of (i) (A) the applicable LIBO Rate divided by (B) one minus the Euro-Dollar Reserve Percentage over (ii) the applicable LIBO Rate. Any Bank wishing to require payment of such additional interest (x) shall so notify the Borrower and the Agent, in which case such additional interest on the Euro-Dollar Loans of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each Interest Period commencing at least three Business Days after the giving of such notice and with respect to which Interest Period the Borrower has not delivered a Notice of Conversion/Continuation prior to receipt by the Borrower of such notice by such Bank and (y) shall notify the Borrower at least five Business Days prior to each date on which interest is payable on the Euro-Dollar Loans of the amount then due it under this Section. ARTICLE 3 CONDITIONS SECTION 3.1 Closing. The obligation of each Bank to make its Loan ------- hereunder is subject to the condition that the Agent shall have received on or before the Closing Date all of the following, in form and substance satisfactory to the Agent and each Bank, and in sufficient copies for each Bank: (a) This Agreement and the Notes, if requested by any Bank, executed by each party thereto; (b) an opinion of the office of the General Counsel of the Obligors, substantially in the form of Exhibit D hereto; --------- (c) evidence of payment by the Borrower of all accrued and unpaid fees, costs and expenses to the extent then due and payable on the Closing Date, together with Attorney Costs of BofA to the extent invoiced prior to or on the Closing Date, plus such additional amounts of Attorney Costs as shall constitute BofA's reasonable estimate of Attorney Costs incurred or to be incurred by it through the closing proceedings (provided that such estimate shall not -------- ---- thereafter preclude final settling of accounts between the Borrower and BofA). (d) all documents the Agent may reasonably request relating to the existence of the Obligors, the corporate authority for and the validity of this Agreement and the Notes, and any other matters relevant hereto, all in form and substance satisfactory to the Agent; (e) Certificate. A certificate signed by a Responsible Officer, ----------- dated as of the Closing Date, stating that: (i) the representations and warranties contained in Article 4 are true and correct on and as of such date, as though made on and as of such date; (ii) no Default or Event of Default exists or would result from the initial Borrowing; and (iii) there has occurred since December 31, 1998, no event or circumstance that has resulted or could reasonably be expected to result in a material adverse effect on the consolidated business, financial condition, results of operations or prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole; and The Agent shall promptly notify the Borrower and the Banks of the Closing Date, and such notice shall be conclusive and binding on all parties hereto. SECTION 3.2 Borrowings. The obligation of each Bank to make the Loan to ---------- be made by it, is subject to the satisfaction of the following conditions precedent on the Disbursement Date: (a) receipt by the Agent of a Notice of Borrowing as required by Section 2.2; (b) the fact that, immediately after such Borrowing, the aggregate outstanding principal amount of the Loans will not exceed the aggregate amount of the Commitments; (c) the fact that, immediately before and after such Borrowing, no Default shall have occurred and be continuing; and (d) the fact that the representations and warranties of the Obligors contained in this Agreement shall be true in all material respects on and as of the date of such Borrowing. The Notice of Borrowing hereunder shall be deemed to be a representation and warranty on the date of such Borrowing by the Borrower as to the facts specified in clauses (b), (c) and (d) of this Section and by each other Obligor, with respect to itself only, as to the facts specified in clause (d) of this Section. ARTICLE 4 REPRESENTATIONS AND WARRANTIES SECTION 4.1 General Representations. The Borrower represents and warrants ----------------------- that each of the representations and warranties of the Borrower contained in Sections 4.1 through 4.10 of the Senior Bank Facility is true and correct in all material respects, and the related definitions, schedules and exhibits contained therein are incorporated herein by reference, mutatis mutandis, and made a part ------- -------- hereof, with the same force and effect as if the same had been herein set forth in their entirety for the benefit of the Banks irrespective of whether the Senior Bank Facility remains in effect, but including and giving effect to any amendment or modification of such provisions or any waiver of compliance therewith, it being understood that no such amendment, modification or waiver shall in any manner constitute an amendment, modification or waiver of the provisions thereof incorporated herein unless the Banks continue to be a party to the Senior Bank Facility; provided, however, that said provisions for the -------- ------- purpose of the incorporation herein shall be amended in the following respects: (a) the dates "December 31, 1996" and "March 31, 1997" contained in Sections 4.4 and 4.5 of the Senior Bank Facility shall be read as December 31, 1998 and June 30, 1999 respectively; (b) the definition "Borrower's 1996 Form 10K" shall be read as "Borrower's 1998 Form 10K" and the date contained in the definition "Borrower's Latest Form 10Q" shall be read as "June 30, 1999." SECTION 4.2 Full Disclosure. All information (other than financial --------------- projections) heretofore furnished by the Borrower to the Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby, taken as a whole, is, and all such written information (other than financial projections) hereafter furnished by the Borrower to the Agent or any Bank, taken as a whole, will be, true and accurate in all material respects on the date as of which such information is stated or certified. All financial projections delivered or to be delivered to the Banks have been or will be prepared on the basis of the assumptions stated therein. Such projections represent the Borrower's reasonable good faith estimate of the Borrower's future financial performance and such assumptions are believed by the Borrower to be fair in light of current business conditions. The Borrower cannot give any assurances that any projections will be realized. The Borrower has disclosed to the Banks in writing any and all facts, known trends or uncertainties the Borrower reasonably expects will have a material and adverse effect on or may affect (to the extent the Borrower can now reasonably foresee), the business, operations or financial condition of the Borrower and its Consolidated Subsidiaries, taken as a whole, or the ability of the Obligors to perform their obligations under this Agreement. SECTION 4.3 Representations of Guarantors. ----------------------------- (a) Each corporate Guarantor is a corporation duly incorporated, validly existing and in good standing (if such concept is applicable in the relevant jurisdiction of incorporation) under the laws of the jurisdiction of its incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. The execution, delivery and performance by each corporate Guarantor of this Agreement are within such Guarantor's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of such Guarantor or of any agreement, judgment, injunction, order, decree or other instrument binding upon such Guarantor or result in the creation or imposition of any Lien on any asset of such Guarantor. (b) Each Guarantor which is a limited partnership is a limited partnership duly formed pursuant to applicable laws and is validly existing and in good standing (if such concept is applicable in the relevant jurisdiction of formation) under the laws of the jurisdiction of its formation, and has all partnership powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. The execution, delivery and performance by each Guarantor which is a limited partnership of this Agreement are within such Guarantor's partnership powers, have been duly authorized by all necessary action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the partnership agreement of such Guarantor or of any agreement, judgment, injunction, order, decree or other instrument binding upon such Guarantor or result in the creation or imposition of any Lien on any asset of such Guarantor. (c) This Agreement constitutes a valid and binding agreement of each Guarantor in each case enforceable in accordance with its terms. ARTICLE 5 COVENANTS The Borrower agrees that, so long as any Bank has any Commitment hereunder or any amount payable under any Note remains unpaid: SECTION 5.1 Information. The Borrower will deliver to each of the Banks: ----------- (a) within 2 Business Days after the filing of each Form 10-K by the Borrower with the Securities and Exchange Commission (and in any event no later than 120 days after the end of each fiscal year of the Borrower), a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of income and cash flows and changes in stockholders' equity for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the Securities and Exchange Commission and accompanied by a report of independent public accountants or nationally recognized standing in scope and manner acceptable to the Securities and Exchange Commission; (b) within 2 Business Days after the filing of each Form 10-Q by the Borrower with the Securities and Exchange Commission (and in any event no later than 90 days after the end of each of the first three quarters of each fiscal year of the Borrower), a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of income and cash flows for such quarter and for the portion of the Borrower's fiscal year ended at the end of such quarter, setting forth in the case of such statements of income and cash flows, in comparative form the figures for the corresponding quarter and the corresponding portion of the Borrower's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by the chief financial officer or the chief accounting officer of the Borrower; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of the chief financial officer or the chief accounting officer of the Borrower substantially in the form of Exhibit E hereto (i) setting forth in reasonable detail the --------- calculations required to establish whether the Borrower was in compliance with the requirements of Sections 5.7 to 5.14, inclusive, on the date of such financial statements, (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto and (iii) listing all Material Subsidiaries on the date of such financial statements; (d) simultaneously with the delivery of each set of annual financial statements referred to in clause (a) above, a statement of the firm of independent public accountants which reported on such statements substantially in the form of Exhibit F hereto (i) whether anything has come to their attention --------- to cause them to believe that any Default existed on the date of such statements and (ii) confirming the calculations set forth in the officer's certificate delivered simultaneously with the annual financial statements in accordance with clause (c) above; (e) within five Business Days after the chief financial officer, the controller, the general counsel or any other officer of the Borrower who is directly responsible for the administration by the Borrower of this Agreement obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the controller of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (f) promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; (g) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Borrower shall have filed with the Securities and Exchange Commission; (h) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(C) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth details as to such occurrence and action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; and (i) from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as the Agent, at the request of any Bank, may reasonably request. SECTION 5.2 Payment of Obligations. The Borrower will pay and discharge, ---------------------- and will cause each Subsidiary to pay and discharge, at or before maturity, all their respective material obligations and liabilities (including, without limitation, tax liabilities and claims of materialmen, warehousemen and the like which if unpaid might by law give rise to a Lien, but excluding any intercompany loans), except where the same may be contested in good faith by appropriate proceedings, and will maintain, and will cause each Subsidiary to maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. SECTION 5.3 Maintenance of Property; Insurance. ---------------------------------- (a) The Borrower will keep, and will cause each Material Subsidiary to keep, all property useful and necessary in its business in good working order and condition or covered by adequate insurance in accordance with Section 5.3(b), ordinary wear and tear excepted. (b) The Borrower will maintain, and will cause each Material Subsidiary to maintain, or be covered under, (i) physical damage insurance on all real and personal property on an all risks basis (including the perils of flood and quake), covering the repair and replacement cost of all such property and consequential loss coverage for extra expense and (ii) public liability insurance (including products/completed operations liability coverage) all on terms and conditions and in scope substantially commensurate with that which is currently maintained as described on Schedule 5.3 hereto and evidenced by the ------------ certificate contemplated by clause (w) of the second following sentence and with risk retention thereunder up to an amount which in the good faith business judgement of the Borrower's or such Material Subsidiary's management could not reasonably be expected to expose the Borrower or such Material Subsidiary to a materially adverse noninsured loss. All such insurance shall be provided by insurers having an A.M. Best policyholders rating of not less than B+ or such other insurers as the Banks may approve in writing. The Borrower will deliver to the Agent for distribution to each of the Banks (w) on the date of the first Borrowing hereunder, a certificate dated such date showing the amount of coverage as of such date, (x) upon request of any Bank through the Agent from time to time full information as to the insurance carried, (y) within seven Business Days of receipt of notice from any insurer a copy of any notice of cancellation or material change in coverage from that existing on the date of this Agreement and (z) forthwith upon receipt thereof, notice of any cancellation or nonrenewal of coverage by the Borrower. SECTION 5.4 Conduct of Business and Maintenance of Existence. The ------------------------------------------------ Borrower will continue, and will cause each Subsidiary to continue, to engage in business of the same general type as now conducted by the Borrower and its Subsidiaries, and will preserve, renew and keep in full force and effect, and will cause each Subsidiary to preserve, renew and keep in full force and effect their respective corporate existence and their respective rights, privileges and franchises necessary in the normal conduct of business; provided that nothing in -------- ---- this Section 5.4 shall prohibit (i) the merger or consolidation of a Subsidiary into the Borrower or the merger or consolidation of a Subsidiary with or into another Person if the corporation surviving such consolidation or merger is a Subsidiary and if, in each case, after giving effect thereto, no Default shall have occurred and be continuing, (ii) the transfer of assets by a Subsidiary to the Borrower or to another Subsidiary if, after giving effect thereto, no Default shall have occurred and be continuing, (iii) the dissolution or termination of the corporate existence of any Subsidiary if the Borrower in good faith determines that such termination is in the best interest of the Borrower and is not materially disadvantageous to the Banks (provided that if such -------- ---- Subsidiary is a Guarantor, it shall have transferred all of its assets and liabilities to the Borrower or another Guarantor as part of such dissolution or termination); and provided further that nothing in this Section 5.4 shall be -------- ------- construed to prohibit a sale, lease or other transfer of assets expressly permitted by Section 5.7. SECTION 5.5 Compliance with Laws. The Borrower will comply, and cause -------------------- each Subsidiary to comply, in all material respects with all material laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder) except where the necessity of compliance therewith is contested in good faith by appropriate proceedings. SECTION 5.6 Inspection of Property, Books and Records. The Borrower will ----------------------------------------- keep, and will cause each Material Subsidiary to keep, proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and will permit, and will cause each Material Subsidiary to permit, representatives of any Bank at such Bank's expense to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their executive officers and independent public accountants, all at such reasonable times during normal business hours and as often as may reasonably be desired without disrupting the normal conduct of business of the Borrower and its Subsidiaries. SECTION 5.7 Mergers and Sales of Assets. --------------------------- (a) The Borrower will not consolidate or merge with or into any other Person; provided that the Borrower may merge with another Person if (i) the -------- ---- Borrower is the corporation surviving such merger and (ii) after giving effect to such merger, no Default shall have occurred and be continuing; and provided -------- further that nothing in this Section 5.7 shall prohibit any transaction ------ expressly permitted by proviso (i) of Section 5.4. ------ (b) the Borrower will not, directly or indirectly, sell, assign, lease, convey or otherwise dispose of whether in one or a series of transactions any property (including accounts and notes receivable, with or without recourse except for dispositions in which (i) at the time of any disposition, no Event of Default shall exist or shall result from such disposition, and (ii) the aggregate book value of all assets so sold by the Borrower and its Subsidiaries, together, shall not exceed in the aggregate 5% of Total Shareholders' Equity, provided that nothing in this Section 5.7 shall prohibit (x) the licensing by ------ ---- the Borrower of software in the ordinary course of its business or in connection with any acquisition or divestiture or (y) any transaction expressly permitted by clause (ii) or (iii) of the first proviso to Section 5.4. SECTION ]5.8 Use of Proceeds. The proceeds of the Loans made under this --------------- Agreement will be used by the Borrower for general corporate purposes. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any "margin stock" within the meaning of Regulation U, other than the share repurchases described in the last sentence of Section 5.12, in which case the relevant Loans will be made in compliance with Regulation U. SECTION 5.9 Negative Pledge. Neither the Borrower nor any Subsidiary will --------------- create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except for the following: (a) Liens existing on the date of this Agreement securing Debt (other than Defeased Debt) outstanding on the date of this Agreement in an aggregate principal or face amount not exceeding $500,000; (b) any Lien existing on any asset of any Person at the time such Person becomes a Subsidiary and not created in contemplation of such event; (c) any Lien on any asset securing Debt incurred or assumed for the purpose of financing all or any part of the cost of acquiring such asset (including without limitation pursuant to a sale/leaseback transaction), provided that such Lien attaches to such asset concurrently with or within 90 - ---- days after the acquisition thereof; (d) any Lien on any asset of any Person existing at the time such Person is merged or consolidated with or into the Borrower or a Subsidiary and not created in contemplation of such event; (e) any Lien existing on any asset prior to the acquisition thereof by the Borrower or a Subsidiary and not created in contemplation of such acquisition; (f) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses of this Section, provided that such Debt is not increased and is not -------- ---- secured by any additional assets; (g) (i) inchoate statutory Liens arising in the ordinary course of its business securing lis pendens, (ii) Liens securing judgments or orders for the payment of money in an amount up to $15,000,000 and (iii) Liens securing judgments or orders for the payment of money in an amount in excess of $15,000,000 but not more than $20,000,000 which are effectively stayed within 30 days of the judgment or order; (h) Liens (other than Liens described in clause (g)) arising in the ordinary course of its business which (i) do not secure Debt or Derivatives Obligations, (ii) do not secure any obligation in an amount exceeding $3,000,000 and (iii) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (i) Liens on cash and certificates of deposit in an aggregate amount not to exceed 1,271,967 issued by Barclays Bank PLC to PMSC Limited to support such bank's obligations to repay the holders of Defeased Debt; and (j) Liens not otherwise permitted by the foregoing clauses of this Section securing Debt in an aggregate principal or face amount at any date not to exceed 5% of Total Shareholders' Equity. SECTION 5.10 Limitation on Debt of Subsidiaries. The Borrower will not ---------------------------------- permit any of its Subsidiaries to incur or at any time be liable with respect to any Debt except for the following: (a) Defeased Debt; (b) Debt secured by Liens permitted by Section 5.9(c); (c) Debt (other than Debt described in clause (a) above) of any wholly-owned Subsidiary (other than a Guarantor) owed to the Borrower or any wholly-owned Subsidiary; (d) Debt (other than Debt described in clause (a) above) of any Guarantor owed to any other Guarantor or to the Borrower; (e) Debt of any Guarantor consisting of the Guarantee granted by such Guarantor under Article 9 of this Agreement; (f) Debt of any Person outstanding at the time such Person becomes a Subsidiary and not incurred in contemplation of such event; provided that such -------- ---- Indebtedness is extinguished or refinanced by the Borrower (solely as Debt of the Borrower) within 90 days after such event; (g) Guarantees of the Consolidated Subsidiaries granted to the banks pursuant to the Senior Bank Facility; or (h) Debt of the Consolidated Subsidiaries not otherwise permitted by the foregoing clauses of this Section not to exceed in the aggregate 5% of Total Shareholders' Equity as of the most recent calendar quarter. SECTION 5.11 Leverage Ratio. The Borrower will not permit at any time the -------------- Leverage Ratio to exceed 2.5:1.0. SECTION 5.12 Minimum Consolidated Tangible Net Worth. At any date, --------------------------------------- Consolidated Tangible Net Worth will not be less than (i) $126,718,000 plus on ---- an annual basis (ii) beginning with the fiscal year beginning January 1, 1999, 50% of Consolidated Net Income, if positive. There shall be excluded from the calculation of Consolidated Tangible Net Worth all acquisition related charges of intangibles and any amounts expended to repurchase shares of the Borrower's common stock in purchases at fair market value up to an amount, in the aggregate, not to exceed 2.5 million shares in a maximum dollar amount not to exceed $70,600,000. SECTION 5.13 Restricted Payments. Neither the Borrower nor any Subsidiary ------------------- (i) will declare or make any Restricted Payment unless, after giving effect thereto, no Default shall have occurred and be continuing or (ii) will optionally prepay, defease or purchase any Debt of the Borrower or any Subsidiary other than (w) outstandings in the amount of $30,000,000 under a promissory note in favor of First Union National Bank payable on November 5, 1999, (x) the Loans, (y) Debt under the Senior Bank Facility, or (z) any other Debt of the Borrower incurred for working capital purposes provided that the -------- ---- aggregate amount of such Debt prepaid, defeased or purchased is less than $15,000,000. SECTION 5.14 Investments. Neither the Borrower nor any Subsidiary will ----------- hold, make or acquire any Investment in any Person other than: (a) (i) Investments in Persons which are Subsidiaries on the date hereof and (ii) Investments in Persons which are Subsidiaries immediately after any such Investment is made; (b) Temporary Cash Investments; (c) Investments in any customer of the Borrower or any of its Subsidiaries (or in any other Person the accounts of which would be consolidated with those of such customer in such customer's consolidated financial statements if such statements were prepared as of the date such Investments are made) which are characterized as "inducements" and are made in connection with long term processing contracts entered into by the Borrower or such Subsidiary with such customer; and (d) any Investment not otherwise permitted by the foregoing clauses of this Section if, immediately after such Investment is made or acquired, the aggregate net book value of all Investments permitted by this clause (d) in any consecutive four quarter period does not exceed (i) 20% of Total Shareholders' Equity and (ii) 10% of Total Shareholders' Equity for any individual Investment. SECTION 5.15 Transactions with Affiliates. The Borrower will not, and ---------------------------- will not permit any Subsidiary to, directly or indirectly, pay any funds to or for the account of, make any investment (whether by acquisition of stock or indebtedness, by loan, advance, transfer of property, guarantee or other agreement to pay, purchase or service, directly or indirectly, any Debt, or otherwise) in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, to, or participate in, or effect, any transaction with, any Affiliate except on an arms-length basis on terms at least as favorable to the Borrower or such Subsidiary than could have been obtained from a third party who was not an Affiliate; provided that the foregoing provisions of this Section -------- ---- shall not prohibit any such Person from declaring or paying any lawful dividend or other payment ratably in respect of all of its capital stock of the relevant class so long as, after giving effect thereto, no Default shall have occurred and be continuing. SECTION 5.16 Additional Guarantors. The Borrower shall from time to time --------------------- cause each Subsidiary of the Borrower or other entity that is not a Material Subsidiary on the date hereof but becomes a Material Subsidiary after the date hereof (whether by acquisition of capital stock by the Borrower or otherwise) to become party hereto as guarantor by executing a supplement hereto in form and substance satisfactory to the Agent, such supplement to be executed by such Material Subsidiary within 10 days after the date on which the Borrower acquires or forms such Material Subsidiary, or a Subsidiary not originally a Guarantor becomes a Material Subsidiary. SECTION 5.17 Limitation on Non-Cash Charges. The Borrower will not ------------------------------ incur non-cash charges that would exceed $25,000,000 in the aggregate with respect to the Borrower and its Consolidated Subsidiaries from and after November 1, 1999 other than (i) depreciation and amortization expensed in the ordinary course of business excluding a one-time acceleration of amortization and depreciation expense determined in accordance with generally accepted accounting principles; and (ii) any acquisition related charges of intangibles within one year of the end of the fiscal quarter in which the acquisition occurred determined in accordance with generally accepted accounting principles. ARTICLE 6 DEFAULTS SECTION 6.1 Events of Default. If one or more of the following events ----------------- ("Events of Default") shall have occurred and be continuing: ---------------- (a) the Borrower shall fail to pay when due any principal of any Loan, or any interest, any fees or any other amount payable hereunder within 3 Business Days of the due date thereof; (b) the Borrower shall fail to observe or perform any covenant contained in Article 5, other than those contained in Sections 5.1 through 5.6; (c) any Obligor shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for 30 days after notice thereof has been given to the Borrower by the Agent at the request of any Bank; (d) any representation, warranty, certification or statement made by any Obligor in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); (e) the Borrower or any Subsidiary shall fail to make any payment in respect of any Material Financial Obligations when due or within any applicable grace period; (f) any event or condition shall occur which results in the acceleration of the maturity of any Material Debt or enables (or, with the giving of notice or lapse of time or both, would enable) the holder of such Debt or any Person acting on such holder's behalf to accelerate the maturity thereof; (g) the Borrower or any Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (h) an involuntary case or other proceeding shall be commenced against the Borrower or any Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or selecting the appointment of a trustee, receiver, liquidator, custodian or other similar official of it, or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Subsidiary under the federal bankruptcy laws as now or hereafter in effect; (i) any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $3,000,000 which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation in excess of $3,000,000; (j) judgments or orders for the payment of money in excess of $15,000,000 shall be rendered against the Borrower or any Subsidiary and such judgments or orders shall remain undischarged for a period of 30 days unless execution shall have been effectively stayed; (k) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 35% or more of the outstanding shares of common stock of the Borrower having the power to vote for the election of directors; or, during any period of 12 consecutive calendar months, individuals who were either (i) directors of the Borrower on the first day of such period or (ii) elected to fill vacancies caused by the ordinary course resignation or retirement of any other director and whose nomination or election was approved by a vote of at least two-thirds of the directors then still in office who were directors of the Borrower on the first day of such period, shall cease to constitute a majority of the board of directors of the Borrower; or (l) the Guarantee granted by any Guarantor under Article 9 of this Agreement shall cease at any time to be in full force and effect (except as expressly permitted by the first proviso of Section 5.4), or the Borrower or any Guarantor shall so assert in writing; then, and in every such event, the Agent shall (i) if requested by the Banks, by notice to the Borrower terminate the Commitments and they shall thereupon terminate, and (ii) if requested by the Banks, by notice to the Borrower declare the Loans (together with accrued interest thereon) to be, and the Loans shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; provided that in the case of any of the Events of -------- ---- Default specified in clause 6.1(g) or 6.1(h) above with respect to the Borrower, without any notice to the Borrower or any other act by the Agent or the Banks, the Commitments shall thereupon terminate and the Loans (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. SECTION 6.2 Notice of Default. The Agent shall give notice to the ----------------- Borrower under Section 6.1(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. ARTICLE 7 THE AGENT SECTION 7.1 Appointment and Authorization; "Agent". Each Bank hereby -------------------------------------- irrevocably (subject to Section 7.9) appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Agent have or be deemed to have any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. Without limiting the generality of the foregoing sentence, the use of the term "agent" in this Agreement with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. SECTION 7.2 Delegation of Duties. The Agent may execute any of its duties -------------------- under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. SECTION 7.3 Liability of Agent. None of the Agent-Related Persons shall ------------------ (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Banks for any recital, statement, representation or warranty made by the Borrower or any Subsidiary or Affiliate of the Borrower, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of the Borrower or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Borrower or any of the Borrower's Subsidiaries or Affiliates. SECTION 7.4 Reliance by Agent. ----------------- (a) The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Borrower), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Banks as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Banks and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Banks. (b) For purposes of determining compliance with the conditions specified in Section 3.1, each Bank that has executed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by the Agent to such Bank for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to the Bank. SECTION 7.5 Notice of Default. The Agent shall not be deemed to have ----------------- knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Agent for the account of the Banks, unless the Agent shall have received written notice from a Bank or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". The Agent will notify the Banks of its receipt of any such notice. The Agent shall take such action with respect to such Default or Event of Default as may be requested by the Banks in accordance with Article 7; provided, however, that unless and until the Agent has received any -------- ------- such request, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Banks. SECTION 7.6 Credit Decision. Each Bank acknowledges that none of the --------------- Agent-Related Persons has made any representation or warranty to it, and that no act by the Agent hereinafter taken, including any review of the affairs of the Borrower and its Subsidiaries, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Bank. Each Bank represents to the Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and credit worthiness of the Borrower and its Subsidiaries, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to the Borrower hereunder. Each Bank also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and credit worthiness of the Borrower. Except for notices, reports and other documents expressly herein required to be furnished to the Banks by the Agent, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, prospects, operations, property, financial and other condition or credit worthiness of the Borrower which may come into the possession of any of the Agent-Related Persons. SECTION 7.7 Indemnification of Agent. Whether or not the transactions ------------------------ contemplated hereby are consummated, the Banks shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of the Borrower and without limiting the obligation of the Borrower to do so), pro rata, from and against any and all Indemnified Liabilities; provided, however, -------- ------- that no Bank shall be liable for the payment to the Agent-Related Persons of any portion of such Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Bank shall reimburse the Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Borrower. The undertaking in this Section shall survive the payment of all obligations hereunder and the resignation or replacement of the Agent. SECTION 7.8 Agent in Individual Capacity. BofA and its affiliates may ---------------------------- make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with the Borrower and its Subsidiaries and Affiliates as though BofA were not the Agent hereunder and without notice to or consent of the Banks. The Banks acknowledge that, pursuant to such activities, BofA or its affiliates may receive information regarding the Borrower or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Borrower or such Subsidiary) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to its Loans, BofA shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Agent, and the terms "Bank" and "Banks" include BofA in its individual capacity. SECTION 7.9 Successor Agent. The Agent may, and at the request of the --------------- Banks shall, resign as Agent upon 30 days' notice to the Banks. If the Agent resigns under this Agreement, the Banks shall appoint from among the Banks a successor agent for the Banks which successor agent shall be approved by the Borrower. If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent may appoint, after consulting with the Banks and the Borrower, a successor agent from among the Banks. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article 7 and Section 10.3 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Banks shall perform all of the duties of the Agent hereunder until such time, if any, as the Banks appoint a successor agent as provided for above. ARTICLE 8 CHANGE IN CIRCUMSTANCES SECTION 8.1 Basis for Determining Interest Rate Inadequate or Unfair. If -------------------------------------------------------- on or prior to the first day of any Interest Period for any Euro-Dollar Loan the Banks advise the Agent that the LIBO Rate as determined by the Agent will not adequately and fairly reflect the cost to the Banks of funding their Euro-Dollar Loans, as the case may be, for such Interest Period, the Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, the obligations of the Banks to make Euro-Dollar Loans, shall be suspended. Unless the Borrower notifies the Agent prior to 10:30 A.M. on the date of any Euro-Dollar Loan for which a Notice of Conversion/Continuation has previously been given that it elects not to convert on such date, such conversion shall instead be made as a Base Rate Borrowing. SECTION 8.2 Illegality. If, on or after the date of this Agreement, the ---------- adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so notify the Agent, the Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans shall be suspended. Before giving any notice to the Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such Bank shall determine that it may not lawfully continue to maintain and fund any of its outstanding Euro-Dollar Loans to maturity and shall so specify in such notice, the Borrower shall immediately prepay in full the then outstanding principal amount of each such Euro-Dollar Loan, together with accrued interest thereon. Concurrently with prepaying each such Euro-Dollar Rate Loan, the Borrower shall borrow a Base Rate Loan in an equal principal amount from such Bank (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks), and such Bank shall make such a Base Rate Loan. SECTION 8.3 Increased Cost and Reduced Return. --------------------------------- (a) If on or after the date hereof, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding with respect to any Euro-Dollar Loan any such requirement included in an applicable Euro-Dollar Reserve Percentage), special deposit, insurance assessment or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting its Euro-Dollar Rate Loans, its Notes or its obligation to make Euro-Dollar Loans and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Euro-Dollar Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Notes with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, (including any determination by any such authority, central bank or comparable agency that, for purposes of capital adequacy requirements, the Commitments hereunder do not constitute commitments with an original maturity of one year or less) has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. (c) Each Bank will promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. SECTION 8.4 Taxes. ----- (a) For the purposes of this Section 8.4, the following terms have the following meanings: "Taxes" means any and all present or future taxes, duties, levies, ----- imposts, deductions, charges or withholdings with respect to any payment by the Borrower or any Guarantor, as the case may be, pursuant to this Agreement or under any Note, and all liabilities with respect thereto, excluding (i) in the case of each Bank and the Agent, taxes imposed on its income, and franchise or similar taxes imposed on it, by a jurisdiction under the laws of which such Bank or the Agent (as the case may be) is organized or in which its principal executive office is located or, in the case of each Bank, in which its Applicable Lending Office is located and (ii) in the case of each Bank, any United States withholding tax imposed on such payments but only at the rate of United States withholding tax that such Bank is subject to on such payments at the time such Bank first becomes a party to this Agreement. "Other Taxes" means any present or future stamp or documentary taxes ----------- and any other excise or property taxes, or similar charges or levies, which arise from any payment made pursuant to this Agreement or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note. (b) Any and all payments by the Borrower or any Guarantor to or for the account of any Bank or the Agent hereunder or under any Note shall be made without deduction for any Taxes or Other Taxes; provided that, if the -------- ---- Borrower or any Guarantor shall be required by law to deduct any Taxes or Other Taxes from any such payments, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) such Bank or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower or any Guarantor, as the case may be, shall make such deductions, (iii) the Borrower or such Guarantor, as the case may be, shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower shall furnish to the Agent, at its address referred to in Section 10.1, the original or a certified copy of a receipt evidencing payment thereof or, in the case of United States withholding tax, a copy of Form 1042-S as a receipt evidencing such payments made by the Borrower during the calendar year. (c) The Borrower agrees to indemnify each Bank and the Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section) paid by such Bank or the Agent (as the case may be) and any liability (including penalties, interest and expenses, so long as the Agent or relevant Bank exercised good faith in not having paid the applicable Taxes or Other Taxes giving rise thereto) arising therefrom or with respect thereto. This indemnification shall be paid within 15 days after such Bank or the Agent (as the case may be) makes demand therefor. Each Bank and the Agent agrees to use reasonable good faith efforts to cooperate with any refund claims that the Borrower may pursue in good faith in order to reduce or eliminate an assessment for Taxes or Other Taxes subject to the indemnification provisions of this subsection (c); provided however, that nothing in this subsection (c) shall be construed to require any Bank or the Agent to institute any administrative or judicial proceeding that is not made in good faith or that, in the reasonable judgment of such Bank or the Agent (as the case may be), is disadvantageous to such Bank or the Agent. (d) Each Bank organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, and from time to time thereafter if requested in writing by the Borrower (but only so long as such Bank remains lawfully able to do so), shall provide the Borrower and the Agent with Internal Revenue Service Form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which exempts the Bank from United States withholding tax or reduces the rate of withholding tax on payments of interest for the account of such Bank or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States. (e) For any period with respect to which a Bank has failed to provide the Borrower or the Agent with the appropriate form pursuant to Section 8.4(d) (unless such failure is due to a change in treaty, law or regulation occurring subsequent to the date on which such form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 8.4(b) or (c) with respect to Taxes imposed by the United States; provided that -------- ---- if a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder the Borrower shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes (f) If the Borrower or any Guarantor is required to pay additional amounts to or for the account of any Bank pursuant to this Section, then such Bank will change the jurisdiction of its Applicable Lending Office if, in the judgment of such Bank, such change (i) will eliminate or reduce any such additional payment which may thereafter accrue and (ii) is not otherwise disadvantageous to such Bank. SECTION 8.5 Base Loans Substituted for Affected Euro-Dollar Loans. If (i) ----------------------------------------------------- the obligation of any Bank to make Euro-Dollar Rate Loans has been suspended pursuant to Section 8.2 or (ii) any Bank has demanded compensation under Section 8.3 or 8.4 with respect to its Euro-Dollar Loans and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Bank through the Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist: (a) all Loans which would otherwise be made by such Bank as Euro-Dollar Rate Loans, shall be made instead as Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks); and (b) after each of its Euro-Dollar Loans, has been repaid, all payments of principal which would otherwise be applied to repay such Euro-Dollar Loans shall be applied to repay its Base Rate Loans instead. SECTION 8.6 Substitution of Bank. If (i) the obligation of any Bank to -------------------- make Euro-Dollar Loans has been suspended pursuant to Section 8.2 or (ii) any Bank has demanded compensation under Section 8.3 or 8.4, the Borrower shall have the right, with the assistance of the Agent, to seek a mutually satisfactory substitute bank or banks (which may be one or more of the Banks) to purchase the Note and assume the Commitment of such Bank. ARTICLE 9 GUARANTY SECTION 9.1 The Guaranty. Each Guarantor, as primary obligor and not ------------ merely as surety, hereby unconditionally guarantees jointly and severally the full and punctual payment (whether at stated maturity, upon acceleration or otherwise) of the principal of and interest on each Note issued by the Borrower pursuant to this Agreement, and the full and punctual payment of all other amounts payable by the Borrower under this Agreement. Upon failure by the Borrower to pay on the date when due any principal on any Loan, or any interest, any fees or any other amount payable hereunder within 3 Business Days of the due date thereof, each Guarantor shall forthwith on demand pay the amount not so paid at the place and in the manner specified in this Agreement. SECTION 9.2 Guaranty Unconditional. The obligations of each Guarantor ---------------------- hereunder shall be unconditional and absolute and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (a) any extension, renewal, settlement, compromise, waiver or release in respect of any obligation of the Borrower or any other Guarantor under this Agreement, or any Note, by operation of law or otherwise; (b) any modification or amendment of or supplement to this Agreement or any Note; (c) any release, impairment, non-perfection or invalidity of any direct or indirect security for any obligation of the Borrower or any other Guarantor under this Agreement or any Note; (d) any change in the corporate existence, structure or ownership of the Borrower or any other Guarantor, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Borrower, any other Guarantor or their respective assets or any resulting release or discharge of any obligation of the Borrower or any other Guarantor contained in this Agreement or any Note; (e) the existence of any claim, set-off or other rights which the Guarantor may have at any time against the Borrower, any other Guarantor, the Agent, any Bank or any other Person, whether in connection herewith or any unrelated transactions, provided that nothing herein shall prevent the assertion -------- ---- of any such claim by separate suit or compulsory counterclaim; (f) any invalidity or unenforceability relating to or against the Borrower or any other Guarantor for any reason of this Agreement or any Note, or any provision of applicable law or regulation purporting to prohibit the payment by the Borrower or any other Guarantor of the principal of or interest on any Note or any other amount payable by the Borrower or any other Guarantor under this Agreement; or (g) any other act or omission to act or delay of any kind by the Borrower, any other Guarantor, the Agent, any Bank or any other Person or any other circumstance whatsoever which might, but for the provisions of this paragraph, constitute a legal or equitable discharge of the Guarantor's obligations hereunder. SECTION 9.3 Discharge Only Upon Payment In Full; Reinstatement In Certain ------------------------------------------------------------- Circumstances. Each Guarantor's obligations hereunder shall remain in full - ------------- force and effect until the Commitments shall have terminated and the principal - ---- of and interest on the Notes and all other amounts payable by the Borrower under this Agreement shall have been paid in full. If at any time any payment of the principal of or interest on any Note or any other amount payable by the Borrower under this Agreement is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of the Borrower or any other Guarantor or otherwise, each Guarantor's obligations hereunder with respect to such payment shall be reinstated at such time as though such payment had been due but not made at such time. SECTION 9.4 Waiver by each Guarantor. Each Guarantor irrevocably waives ------------------------ acceptance hereof, presentment, demand, protest and any notice not provided for herein, as well as any requirement that at any time any action be taken by any Person against the Borrower or any other Guarantor or any other Person. SECTION 9.5 Subrogation and Contribution. Upon making any payment ---------------------------- hereunder, each Guarantor shall be subrogated to the rights of the payee against the Borrower with respect to such payment and shall have a right of contribution with respect to the other Guarantors; provided that such Guarantor shall not -------- ---- enforce any payment by way of subrogation and shall not enforce any right to receive any payment, including any right of contribution or for any other reason, from any other Guarantor with respect to such payment until all amounts payable by the Borrower hereunder and under the Notes have been paid in full. SECTION 9.6 Stay of Acceleration. If acceleration of the time for payment -------------------- of any amount payable by the Borrower under this Agreement or any Note is stayed upon insolvency, bankruptcy or reorganization of the Borrower, all such amounts otherwise subject to acceleration under the terms of this Agreement shall nonetheless be payable by each Guarantor hereunder forthwith on demand by the Agent made at the request of the requisite proportion of the Banks specified in Article 6 of the Agreement. SECTION 9.7 Limit of Liability. The obligations of each Guarantor ------------------ hereunder shall be limited to an aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance under Section 548 of the United States Bankruptcy Code or any comparable provisions of any applicable state law. ARTICLE 10 MISCELLANEOUS SECTION 10.1 Notices. All notices, requests and other communications to ------- any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (a) in the case of the Borrower or the Agent, at its address, facsimile number or telex number set forth on Schedule 10.1 hereto, ------------- (b) in the case of any Guarantor, in care of the Borrower, (c) in the case of any Bank, at its address, facsimile number or telex number set forth in its Administrative Questionnaire or (d) in the case of any party, such other address, facsimile number or telex number as such party may hereafter specify for the purpose by notice to the Agent and the Borrower. Each such notice, request or other communication shall be effective: (i) if given by telex, when such telex is transmitted to the telex number specified in this Section and the appropriate answerback is received; (ii) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received; (iii) if given by overnight courier, 24 hours after such communication is delivered to such courier with postage prepaid, addressed as aforesaid, so long as such courier can confirm delivery at such address; or (iv) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Agent under Article 2 or -------- ---- Article 8 and notices to the Borrower under Section 6.2 shall not be effective until received. SECTION 10.2 No Waivers. No failure or delay by the Agent or any Bank in ---------- exercising any right, power or privilege hereunder or under any Note shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 10.3 Costs and Expenses. ------------------ (a) The Borrower shall reimburse BofA (including in its capacity as Agent) within five Business Days after demand for all reasonable costs and expenses incurred by BofA (including in its capacity as Agent) in connection with the development, preparation, delivery, administration and execution of, and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this Agreement, any Loan Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including reasonable Attorney Costs incurred by BofA (including in its capacity as Agent) with respect thereto. (b) The Borrower shall pay or reimburse the Agent, and each Bank within five Business Days after demand for all reasonable costs and expenses (including Attorney Costs) incurred by them in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or any other Loan Document during the existence of an Event of Default or after acceleration of the Loans (including in connection with any "workout" or restructuring regarding the Loans, and including in any insolvency proceeding or appellate proceeding). (c) Except for actions by the Borrower against the Agent or the Banks, the Borrower agrees to indemnify the Agent and each Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee ---------- harmless from and against any and all liabilities, losses, damages (excluding consequential damages), costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of this Agreement or any actual or proposed use of proceeds of Loans hereunder; provided -------- that no Indemnitee shall have the right to be indemnified hereunder (including, - ---- without limitation, pursuant to Section 8.4(c)) for such Indemnitee's own gross negligence or willful misconduct as determined by a court of competent jurisdiction. SECTION 10.4 Sharing of Set-Offs. Each Bank agrees that if it shall, by ------------------- exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to any Note held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to any Note held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Notes held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes held by the Banks shall be shared by the Banks pro rata; provided that -------- ---- nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of any Obligor other than its indebtedness hereunder. Each Obligor agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of such Obligor in the amount of such participation. SECTION 10.5 Amendments and Waivers. Any provision of this Agreement or ---------------------- the Notes may be amended or waived if, but only if such amendment or waiver is in writing and is signed by the Borrower and all of the Banks (and, if the rights or duties of the Agent are affected thereby, by the Agent). SECTION 10.6 Successors and Assigns. ---------------------- (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or ----------- any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower and the Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided -------- that such participation agreement may provide that such Bank will not agree to --- any modification, amendment or waiver of this Agreement described in clause (i), (ii), or (iii) of Section 10.5 without the consent of the Participant. Subject to Section 10.6(e), the Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article 8 with respect to its participating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or a proportionate part (equivalent to an -------- initial Commitment of not less than $5,000,000) of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit G hereto executed by such Assignee and such --------- transferor Bank, with (and subject to) the subscribed consent of the Borrower, which shall not be unreasonably withheld or delayed, and the Agent; provided -------- that if an Assignee is an affiliate of such transferor Bank or was a Bank - immediately prior to such assignment, no such consent shall be required and - provided further that any such assignment may be for an amount equivalent to an ----- ------- initial Commitment of less than $5,000,000 if consented to by the Borrower. Upon execution and delivery of such instrument (including a Notice of Assignment and Assumption substantially in the form of Annex I thereto) and payment by such ------- Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Agent and the Borrower shall make appropriate arrangements so that, if required, new Notes are issued to the Assignee. In connection with any such assignment (other than any such assignment in which the Assignee is an affiliate of the transferor Bank or was a Bank immediately prior to such assignment), the transferor Bank shall pay to the Agent an administrative fee for processing such assignment in the amount of $2,500. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall deliver to the Borrower and the Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 8.4. (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.3 or 8.4 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.2, 8.3 or 8.4 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. SECTION 10.7 Collateral. Each of the Banks represents to the Agent and ---------- each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 10.8 Governing Law; Submission to Jurisdiction. This Agreement ----------------------------------------- and each Note shall be governed by and construed in accordance with the laws of the State of New York. Each Obligor hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. Each Obligor irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. SECTION 10.9 Counterparts; Integration; Effectiveness. This Agreement may ---------------------------------------- be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. This Agreement shall become effective upon receipt by the Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Agent in form satisfactory to it of telegraphic, telex, facsimile or other written confirmation from such party of execution of a counterpart hereof by such party). SECTION 10.10 WAIVER OF JURY TRIAL. EACH OF THE OBLIGORS, THE AGENT AND -------------------- THE BANKS HEREBY IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 10.11 Confidentiality. The Agent and each Bank agrees to keep any --------------- information delivered or made available by the Obligors to it confidential from anyone other than persons employed or retained by such Bank who are expected to become engaged in evaluating, approving, structuring or administering the Loans and who will use any such information solely for such purposes; provided that -------- ---- nothing herein shall prevent any Bank from disclosing such information (a) to any other Bank or to the Agent, (b) to any other Person if reasonably incidental to the administration of the Loans, (c) upon the order of any court or administrative agency, (d) upon the request or demand of any regulatory agency or authority, (e) which had been publicly disclosed other than as a result of a disclosure by the Agent or any Bank prohibited by this Agreement, (f) in connection with any litigation to which the Agent, any Bank or its subsidiaries or Parent may be a party, (g) to the extent necessary in connection with the exercise of any remedy hereunder, (h) to such Bank's or Agent's legal counsel and independent auditors and (i) subject to provisions substantially similar to those contained in this Section, to any actual or proposed Participant or Assignee; provided further that each person who receives any such information -------- ------- from any Bank or the Agent as permitted by this Section shall be informed by such Bank or the Agent of the existence and the contents of this Section. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. POLICY MANAGEMENT SYSTEMS CORPORATION CYBERTEK CORPORATION PMSC LIMITED CYBERTEK SOLUTIONS, L.P. By POLICY MANAGEMENT SYSTEMS CORPORATION; its General Partner THE LEVERAGE GROUP INC. By: ____________________ ____________________ BANK OF AMERICA, N.A., as Agent By: ____________________ ____________________ COMMITMENT: BANKS: $15,000,000 BANK OF AMERICA, N.A., as a Bank By: ____________________ ____________________ $15,000,000 WACHOVIA BANK, N.A. By: ____________________ ____________________ $40,000,000 FIRST UNION NATIONAL BANK By: ____________________ ____________________ IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. POLICY MANAGEMENT SYSTEMS INVESTMENTS, INC. By: _____________________ _____________________ EX-21.1 10 POLICY MANAGEMENT SYSTEMS CORPORATION LIST OF SUBSIDIARIES AS OF DECEMBER 31, 1999
JURISDICTION OF INCORPORATION SUBSIDIARY NAME OR ORGANIZATION The Leverage Group, Inc. . . . . . . . . . . . . . . . . . . Connecticut Financial Administrative Services, Inc.. . . . . . . . . . . Connecticut Information Services Holding, Inc. . . . . . . . . . . . . . Delaware Life Software Holding, Inc.. . . . . . . . . . . . . . . . . Delaware PMSC Limited . . . . . . . . . . . . . . . . . . . . . . . . Delaware Policy Management Systems Investments, Inc.. . . . . . . . . Delaware Software Services Holding, Inc.. . . . . . . . . . . . . . . Delaware ViLink Corporation . . . . . . . . . . . . . . . . . . . . . Delaware DORN Technology Group, Inc.. . . . . . . . . . . . . . . . . Michigan Policy Management Corporation. . . . . . . . . . . . . . . . South Carolina 204 Woodhew, L.P.. . . . . . . . . . . . . . . . . . . . . . Texas CYBERTEK Corporation . . . . . . . . . . . . . . . . . . . . Texas Cybertek Solutions, L.P. . . . . . . . . . . . . . . . . . . Texas Creative Computer Systems Pty Limited. . . . . . . . . . . . Australia PMSC Pty Limited . . . . . . . . . . . . . . . . . . . . . . Australia Policy Management Systems sterreich GmbH. . . . . . . . . . Austria Policy Management Systems (Barbados), Ltd. . . . . . . . . . Barbados Policy Management Systems Canada, Ltd. . . . . . . . . . . . Canada Policy Management Systems Corporation A/S (f/k/a Simcorp). . Denmark CAF Systemhaus f r Anwendungsprogrammierung GmbH . . . . . . Germany PMS micado ProduktSysteme Gesellschaft f r EDV Vertrieb mbH. Germany PMS micado SoftwareConsult GmbH. . . . . . . . . . . . . . . Germany Policy Management Systems (Germany) GmbH . . . . . . . . . . Germany PMSC Limited . . . . . . . . . . . . . . . . . . . . . . . . Hong Kong Policy Management Systems India Private Limited. . . . . . . India PMSC Limited . . . . . . . . . . . . . . . . . . . . . . . . Ireland PMSC K.K.. . . . . . . . . . . . . . . . . . . . . . . . . . Japan Creative Solutions B.V.. . . . . . . . . . . . . . . . . . . Netherlands PMSC Limited . . . . . . . . . . . . . . . . . . . . . . . . New Zealand Policy Management Systems Corporation AS . . . . . . . . . . Norway Policy Management Systems Corporation (Proprietary) Limited. S. Africa Policy Management Systems Corporation AB . . . . . . . . . . Sweden Software Consult micado AG/SA/Ltd. . . . . . . . . . . . . . Switzerland Creative Insurance Services Limited. . . . . . . . . . . . . UK Creative Software Development Limited. . . . . . . . . . . . UK Policy Management Systems Corporation Limited. . . . . . . . UK Policy Management Systems Europe, Limited. . . . . . . . . . UK
EX-23.1 11 Exhibit 23 Consent of Independent Accountants We consent to the incorporation by reference in the registration statements of Policy Management Systems Corporation (the "Company") on Form S-8 (No. 33-59553, 33-59555, 33-59575, 333-67555 and 333-78207) of our report dated March 30, 2000, on our audits of the consolidated financial statements and financial statement schedule of the Company as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999, which report is included in this Annual Report on 10-K. PricewaterhouseCoopers, LLP Atlanta, Georgia March 30, 2000 EX-27.1 12
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS OF POLICY MANAGEMENT SYSTEMS CORPORATION AS OF AND FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 17744 89 112669 13000 0 211999 275214 132347 706288 75995 0 0 0 356 321205 706288 0 644019 0 589631 158660 0 10693 (113119) (41148) (71971) 0 0 0 (71971) (2.02) (2.02)
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