-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, aREOwFBbhYuxjlizUp9ywWl/vckorUc06OaUWR8AQH2/bfkQV4SLK/cx/+8OUMeV 2QTw17ElZwOdDwDikhZXiQ== 0000356226-94-000024.txt : 19941125 0000356226-94-000024.hdr.sgml : 19941125 ACCESSION NUMBER: 0000356226-94-000024 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19941123 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLICY MANAGEMENT SYSTEMS CORP CENTRAL INDEX KEY: 0000356226 STANDARD INDUSTRIAL CLASSIFICATION: 6411 IRS NUMBER: 570723125 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-10557 FILM NUMBER: 94561591 BUSINESS ADDRESS: STREET 1: ONE PMS CTR STREET 2: PO BOX TEN CITY: COLUMBIA STATE: SC ZIP: 29202 BUSINESS PHONE: 8037354000 10-K/A 1 PAGE <1> RESTATED - SEE "INTRODUCTORY NOTE". SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1993 Commission file number 0-10175 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 PMS Center (P.O. Box Ten) Blythewood, S.C. (Columbia, S.C.) 29016 (29202) (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (803)735-4000 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 No X 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. The aggregate market value of the voting stock held by non-affiliates of the registrant was $797,531,112 at March 11, 1994 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 11, 1994 was 22,637,021. DOCUMENTS INCORPORATED BY REFERENCE Item 4 of Registrant's Report on Form 8-K, dated August 17, 1993, is incorporated by reference in Part II. PAGE <2> INTRODUCTORY NOTE THE INFORMATION CONTAINED HEREIN HAS BEEN RESTATED IN NOVEMBER 1994 TO REFLECT ADJUSTMENTS RESULTING FROM SPECIAL AUDITS OF THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS (SEE NOTE 2 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS). UNLESS OTHERWISE STATED, HOWEVER, INFORMATION CONTAINED HEREIN IS AS OF DECEMBER 31, 1993. PART I ITEM 1. BUSINESS THE COMPANY ORGANIZATION AND GENERAL DEVELOPMENT Policy Management Systems Corporation ("Company"), a leading provider of standardized insurance software systems and automation, administration and information services to the insurance industry, is a South Carolina corporation incorporated in 1980. At December 31, 1993, the Company had 4,350 full-time employees and 4,786 total employees located in offices in North America, Europe and Australia. Prior to 1985, the Company operated primarily as a provider of insurance software systems and related automation support services to property and casualty insurance companies. Since that time the Company has broadened its software product and services offerings through the introduction of new internally developed products and services and business and software product acquisitions. During 1985, the Company initiated an expansion into the property and casualty information services business to assist underwriters and claims professionals in the property and casualty insurance marketplace. The Company began to acquire regional providers of information services to provide the capability of gathering and electronically communicating information from all states and regions. By the end of 1986, the Company had completed acquisitions, which provided for national coverage for Motor Vehicle Reports and Personal Lines inspections. By November 1988, the Company had completed acquisitions, which provided for national coverage for Premium Audits and Commercial Line Inspections. Through its nationwide information gathering network, the Company provides the property and casualty insurance industry with the information to assist insurers in making more informed decisions on risk selection, pricing and claims adjusting. Most of these services are provided on an automated basis to allow the consistent application of underwriting standards and rules. PAGE <3> From 1990 through 1993, the Company acquired businesses which provide information services related to hospital medical records, attending physician statements and personal history interviews primarily for the life and health insurance industry. Since then, the Company has expanded its operations and information services offerings to the point that it now offers a wide range of information services and related data base products to the property and casualty, life and health insurance markets. Between 1986 and 1989, the Company, through business acquisitions, took its initial steps toward becoming a major supplier of automation solutions for the life and health insurance markets. Since then, the Company has continued to expand its products and services offerings and in August 1993, acquired CYBERTEK Corporation ("CYBERTEK") of Dallas, Texas. CYBERTEK is a leading provider of information management systems and processing solutions designed to meet the needs of the life insurance and financial services industries. The Company is currently enhancing and integrating the business functions of CYBERTEK products with certain of the Company's Series III industry applications and its Integrated Application Platform architecture. The Company expects this effort to continue through 1996 with the anticipated initial release of the integrated applications being made generally available in late 1994 or early 1995 with subsequent releases to follow. CYBERTEK has a customer base of over 100 companies. In 1987, the Company began to place more emphasis on the processing services market for both the private and public sectors, and today provides a full range of outsourcing services. These services can range from processing a single line of business to assuming responsibility for complete systems maintenance, facilities management and processing and administration support of an insurance company's business. The Company provides outsourcing services from data centers located in North America, Europe and Australia. During the early stages of the Company's development, a major portion of the Company's revenues were derived from systems licensing activities (43.7% in 1985). As the Company has continued to enhance its position as a provider of a full range of business solutions, based upon automation, administration support and information, to the insurance industry, the portion of the Company's revenues derived from systems licensing activities has steadily declined, representing 16.5% of total revenues in 1993. The remainder of the Company's revenues are derived primarily from automation, administration and information services activities. The Company's strategy is to build a larger base of recurring systems licensing and services revenues. As a result of this emphasis, initial license charges, that portion of license charges from systems licensing activities which is generally recognized as PAGE <4> revenue upon execution of a license obligation and delivery of the product, have continually declined, representing 5.8% of total revenues in 1993, compared to 16.4% in 1985. RECENT DEVELOPMENTS In August 1993, the Company engaged independent accountants to conduct a special audit of the Company's consolidated balance sheet as of December 31, 1992 and its consolidated financial statements as of and for the six months ended June 30, 1993. As a result of this audit, the Company determined that retained earnings previously reported as of December 31, 1992 required adjustment. These adjustments were due to errors in the application of accounting principles and subsequent discovery of facts existing at February 26, 1993, the date of the predecessor auditor's report. In February 1994, the Company engaged independent accountants to audit the Company's consolidated financial statements as of and for the twelve months ended December 31, 1993 and 1992. As a result of the 1992 audit, the Company determined the specific prior period or periods in 1992 affected by the above adjustments and also determined that retained earnings previously reported as of December 31, 1991 required adjustment (see Note 2 of Notes to Consolidated Financial Statements). The Company has restated its financial statements for such periods and has filed amended annual and quarterly reports on Forms 10-K and 10-Q for the years 1993 and 1992. SEGMENT INFORMATION The Company operates in one business segment, the providing of computer software systems and automation and administration support and information services to the insurance industry. The majority of the Company's revenues are generated from products and services provided in the United States and no one customer accounted for more than 10% of revenues during the year ended December 31, 1993. The following table illustrates the relative percentages of total revenue represented by the Company's products and services in the United States and foreign countries. Percent of Revenue Year ended December 31, 1993 1992 1991 (Restated) (Restated) United States........87.1% 84.5% 88.3% Canada............... 4.3% 3.5% 3.6% Europe............... 5.5% 8.3% 5.7% Asia................. 3.1% 3.7% 2.4% PAGE <5> PRODUCTS AND SERVICES The Company offers over 135 business solutions, which include more than 90 application software systems and a wide range of outsourcing, professional and information services, designed to meet the needs of the property and casualty, life and health insurance markets. The Company's primary software systems currently run on mid- range and large scale IBM computers or IBM compatible equipment utilizing most IBM operating systems. In addition, a number of systems run on intelligent workstations. Most customers licensing the Company's software systems also use the Company's professional services, which are normally provided under separate agreements. Customers using the Company's information services do not necessarily license the Company's software products. Over 100 customers currently utilize the Company's various outsourcing services, which are provided under contracts having terms up to fifteen years. The Company obtains from third parties licenses for a wide range of software products and services which are used in varying degrees in developing and enhancing the Company's products and in performing services for its customers. Such products range from mainframe operating systems to graphical user interfaces. Although such products licensed from third parties are important to the products and services offered by the Company, there is generally no single product licensed from a third party without which the Company's development of its products and performing of its services could not continue. SOFTWARE PRODUCTS The Company's software products automate most insurance processing functions, including various underwriting, claims accounting, financial and regulatory reporting and cash management functions. The systems have been designed with the intent to permit ease of use and provide flexibility in adapting them to a particular customer's requirements and modifying them as business conditions change. The systems are modular in structure and facilitate the application of updates and enhancements and interfacing and integration of the different systems. Most of the systems will operate on either a stand-alone basis or in conjunction with each other. Series III technologies serve as a platform for the Company's systems for the property and casualty, life and health insurance markets. A primary objective of Series III is the full integration of the information and data gathering, processing, PAGE <6> underwriting, claims handling and reporting processes for providers of insurance to create a cooperative processing environment where insurance professionals, using advanced intelligent workstations, can process multiple tasks concurrently with minimal clerical support and data entry. The foundation of Series III is the Company's Integrated Application Platform ("IAP"), more fully described below. Series III uses advanced and emerging technologies such as relational data bases, graphical user interfaces and imaging. Series III technologies allow system upgrades, additions and interfaces to be implemented much quicker and at reduced costs, with a minimum of disruption to ongoing operations. Using relational data bases and cooperative processing between hardware platforms and allowing access to data from multiple sources through advanced networks, Series III is intended to provide a seamless flow of information between insurance agents, branch offices and the home office of insurance companies. The Company relies upon contract, intellectual property, 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 secret and proprietary information to third parties without the consent of the Company and generally restrict their use of the Company's products to only their operations. The Company also informs its employees of the proprietary nature of its products and obtains from them an agreement not to disclose proprietary information. Notwithstanding those restrictions, it may be possible for competitors of the Company to obtain unauthorized access to the Company's proprietary information. The Company also has registered service marks or pending applications for registration for many of its software products. The following is a detailed description of current principal software products: POLICY MANAGEMENT SYSTEM ("PMS") - PMS, the Company's most comprehensive and widely used mainframe system, performs the functions essential to all phases of the management of property and casualty insurance policies. This system, which supports business written by property and casualty insurance companies, is designed to reduce paper work dependency, facilitate rapid access to information and improve service. Principal automated functions performed by PMS are policy rating and premium calculation, policy printing, renewal and endorsement generation and certain reinsurance processing. POINT - An integrated midrange property and casualty processing system designed to run on IBM's AS/400 computer, providing the basic system functions (including policy, claims, financial and reinsurance management and reporting) used by PAGE <7> property and casualty insurance companies with annual direct written premiums of up to approximately $150 million. BILLING AND COLLECTION MANAGEMENT SYSTEM ("BCMS") - An on- line system that automates management of property and casualty insurance billing and collections for single, consolidated, third party, agency, and account current disciplines. Personal and commercial lines are supported and may be collected and paid through on-line cash entry, lockbox, optical character readers (OCR), or electronic funds transfer (EFT) methods. The system features user defined pay plans, finance and service charges and delinquency plans and supports payroll deduction plans. BILLING AND COLLECTION WORKSTATION ("BCWS") - Client/server solution that automates the management of billing and collections for property and casualty, individual life and health, and group life and health lines of business. Multiple billing disciplines (including single policy, account bill, third party, agency, and account current) and collection methods (including cash entry, lockbox, OCR, EFT, and credit card) are designed to offer enhanced flexibility to the user. INSURANCE MANAGEMENT INFORMATION SYSTEM ("IMIS") - A management information and reporting system that provides premium, loss experience, reinsurance and actuarial reporting to satisfy insurance company management and statutory reporting requirements for property and casualty insurance companies. MANAGEMENT INFORMATION SYSTEMS ("MIS") - A client/server system that provides data generation and manipulation capabilities to fulfill the management, annual statement, actuarial, bureau, and other reporting requirements of a broad range of insurance companies. MANAGEMENT WORKSTATION ("MWS") - An intelligent workstation based system designed for use in conjunction with MIS to capture and display management information. MANAGEMENT DECISION SUPPORT ("MDS") - Workstation tool that provides insurance professionals with the capability to design and run queries against information contained in relational databases and allows on-line access to current and historical versions of various standard reports. MICRO MAINFRAME SYSTEM ("MMS") - An intelligent workstation based system designed to meet the policy processing and rating needs of property and casualty insurance companies. MMS emulates mainframe functions on a workstation allowing the maintenance of software rating applications that run in either a mainframe or workstation environment. PAGE <8> UNDERWRITING WORKSTATION ("UWS") - Client/server solution that stores and manages policy information in a central location to improve the accuracy and consistency of underwriting decisions. Automates rate, quote, and policy issuance, eliminating the need for manual intervention. UNDERWRITING MANAGEMENT SYSTEM ("UMS") - An integrated system providing the capability to store and manage policy information in a central location to facilitate the accuracy and consistency of underwriting decisions. CLAIMS HANDLING SYSTEM ("CHS") - An intelligent workstation based system which automates most claims handling related functions of property and casualty insurance companies, including claims payments, and facilitates the uploading and downloading of claims information between host and remote computers. CLAIMS WORKSTATION ("CWS") - Client/server system that automates the claims handling processes, as well as providing access to the various claims functions and information in a distributed environment. PRODUCT DEVELOPMENT SUPPORT SYSTEM ("PDSS") - Client/server system which facilitates and expedites the development of new and modification of existing life and health insurance products by centralizing product rules and information into a building block format for easy, timely access and manipulation. Once product rules and information are input, they can be used for a number of different products. HEALTH ENTERPRISE SOLUTION ("HES") - A comprehensive series of systems designed for the administration and management of most indemnity and managed care health products. Functions supported include point of service, capitation and a full array of other managed care requirements. HES includes the ADMIN, and CAPS as sub-systems. CLAIMS ADMINISTRATION AND PAYMENT SYSTEM ("CAPS") - A claims administration and payment system with advanced capabilities supporting the cost management and extensive data collection needs of most health insurers. CAPS is utilized primarily by large health insurance companies and Blue Cross and Blue Shield organizations. CLAIMS ADMINISTRATION SYSTEM ("CAS II") - An on-line immediate update claims system that supports cost management programs, such as Preferred Provider Organizations, precertifications and second surgical opinions for medium-sized insurance companies or self- administered clients. PAGE <9> GROUP ADMINISTRATION AND BILLING SYSTEM ("ADMIN") - A group health insurance billing and administration system which automates and integrates membership, premium calculation, billing and collection, receivables, arrears and information management. This product is used primarily by large health insurance companies and Blue Cross and Blue Shield organizations. PROVIDER INFORMATION SYSTEMS ("PIMS") - A relational database provider information solution that retains information on demographics and pricing solutions in order to administer HMO and managed care business requirements. PMSO AUBEN-UND INNENDIENST WORKSTATION ("AIWS") - A single use interface which allows users to support the sale of life, health, accident, and property insurance in Europe. AIWS is an all lines quote, offer and application system and provides agents with a client system for acquisition data and detailed policy information. Based on OS/2, AIWS can operate in stand-alone or local area network environments and can communicate with administration systems. AGENCY WORKSTATION-THE BUNDLE ("AWS") - A micro-based agency system that provides personal and commercial lines rating, flood rating, marketing functions and access to Motor Vehicle Reports. ADVANCED COMMUNICATIONS ACCESS ("ACA") - A Series II genesis bridge between application systems that interfaces IBM mainframe- based company systems with mini- and micro-based systems. ACA provides communications, data translation, and routing capabilities, and supports ACORD and SCIO standards for several lines of business. PRIVATE LIFE INSURANCE SYSTEM ("PLIS") - European automatic user-controlled computer system for processing of individual life insurance policies which covers all functions in the production of Individual Life Insurance and Pension Plans including: signing of new policies, policy endorsements, reimbursements, premium payments, simulation and statistics and case processing. AUTOMATED INFORMATION SYSTEM ("AIS") - An integrated information order, delivery, evaluation, and management platform featuring a mainframe database that can be accessed by terminals or intelligent workstations via cooperative processing. AIS allows users to access information designed to facilitate the insurance underwriting and claims settlement process from multiple vendors. CLIENT INFORMATION SYSTEM ("CIS") - DB/2-based mainframe system which serves as a common repository of information relating to an insurance company's clients and provides an index to other corporate data. CIS bridges computer systems, regardless of the PAGE <10> software product and vendor, and displays various business relationships that exist between the client and the insurance company. CLIENT INFORMATION WORKSTATION ("CIWS") - Client/server solution that automates the management of information about a person, company, prospect or provider who has a relationship with an insurance company. WORK IN PROCESS ("WIP") - WIP facilitates the management, including tracking, assigning, reassigning and controlling, of various tasks generated in an insurance company environment. CORPORATE INVESTMENT MANAGEMENT SYSTEMS ("CIMS") - A series of investment systems designed for managing complex investment portfolios which handles most types of securities and includes portfolio segmentation, asset valuation and complete accounting control capabilities. These systems, which will operate on a stand-alone basis or in conjunction with each other, may be used by all types of insurance companies. FINANCIAL MANAGEMENT SYSTEM ("FMS") - An integrated accounting and financial reporting system which includes general ledger and budgeting capabilities, distribution of income and expense data by categories and the preparation of a variety of financial and accounting reports. INTEGRATED APPLICATION PLATFORM ("IAP") - A technical platform which, using cooperative processing technologies, provides the capability to develop applications and link software systems, whether they be those of the Company or another party. Includes data models, process models and other Series III architecture foundations. CK4/VS - An advanced administration system that provides real-time processing for advanced or traditional life, annuity and health insurance products. CK4/VS' exclusive Product Line Architecture allows the user to define unique, competitive products without costly modifications. CK4/VS offers fast product introduction, increased productivity and strong agent and policyholder service because of its real-time processing and communication structure. CK4 WORKSTATION ADVISOR - Allows the Personal Computer (PC) to be utilized to provide an intelligent administrative workstation for mainframe and client/server based applications. CK4 Workstation Advisor acts as a PC-based "front-end" to mainframe- based applications with pre-programmed transactions, on-line user documentation and function help at the data element level. A PAGE <11> scripting facility allows business processes to be re-engineered to improve productivity and enhance customer service. CK4 PLAN ADVISOR - A PC-based system which utilizes expert system technology to provide an efficient method of designing, developing and introducing new products. CK4 Plan Advisor creates reference files and related user table entries required to support a new plan or to convert an existing plan to CK4/VS. CK4 Plan Advisor eliminates the need for extensive insurance systems knowledge normally required to establish the files and tables by asking a series of easy to understand questions, leading the user through a selection process of the required plan specifics, table updates and premium rates. SALESPRO - An integrated sales illustration system used by agents, which produces advanced sales illustrations for products like universal life, variable universal life, interest sensitive life, whole life and annuities. Options for split dollar, comparisons, executive bonus plans, and deferred compensation are also available. ELECTRONIC POLICY ISSUE - Takes data compiled in the SalesPro proposal and transmits it to the home office. This system provides the customer with the option of handling the entire issuing process, including printing the application and policy form, or, simply transmitting the policy to the home office mainframe for review and approval. FIELD LINK - Provides communications and data linkage to connect their remote sales force with home office databases. Field Link expedites policy issue and delivery by making up-to-the-minute information available to both the agent and the home office via the agent's PC. Policy data may be held solely at the mainframe, or may be down-loaded to a database at the PC that contains selected policy data. Queries may then be directed to either the PC database or the mainframe, as needed. CK4 DOCUMENT MANAGER - Is designed to utilize PCs with a Local Area Network (LAN) within a company to provide efficient document management software for incoming and outgoing faxes and scanned documents within a company. Instead of information arriving on a fax machine, a PC-based fax server accepts incoming faxes electronically and routes or distributes the documents to users both internally or externally. Additionally, CK4 Document Manager accommodates the integration of electronic mail and scanned documents to provide a comprehensive document management system. CYBERSCRIBE V - An automated correspondence system for the PC that can draw policy or client information from databases. The clients' existing word processing package is then used to create PAGE <12> letter text which CYBERSCRIBE V merges with the database information. MICRO TO MAINFRAME COMMUNICATION ARCHITECTURE (MMCA) - Provides the telecommunications framework that allows connectivity from PCs to host mainframe computers, with no changes to applications programs, in a variety of environments. MMCA is a connectivity tool that gives a system the flexibility to adapt to new data communications hardware and software. NEW BUSINESS EXPEDITOR - Integrates several existing systems to automate the processing of a new policy application, including the initial sales proposal, policy submission, underwriting, information gathering, and final policy issuance. New Business Expeditor integrates with CK4/VS and other individual life insurance administrative systems. CK4 UNDERWRITING ADVISOR - Uses the COGENSYS Judgment Processor combined with Auto/Issue and an application entry component to automate the underwriting process. The Judgment Processor uses case-based reasoning to make decisions according to the parameters taught to the system by an experienced life insurance underwriter. CK4 INFORMATION EXPEDITOR - Uses electronic data interchange to manage the information coming into the home office from third party information providers. Reports from information providers such as blood test results and inspection reports are receipted and matched with the application file electronically. COGENSYS SOFTWARE: THE JUDGMENT PROCESSOR - A software system designed to emulate the decision-making logic of an effective human expert within a specific area of intellectual activity. The Judgment Processor "learns" the logic of its mentor by observing real examples of the mentor's decision making process as the mentor continues to work at day-to-day tasks. THE INFORMATION MANAGER - A front-end system with the ability to create and manipulate electronic versions of forms which are used in conjunction with the Judgment Processor. It lets the expert (mentor) define data entry forms, calculations, report generation functions and data communications with minimal assistance from a programmer. It includes a flexible text analysis and evaluation system that allows the translation of free-form textual data into a computer- recognizable, pre-defined format. The system is flexible and PAGE <13> multilingual. It provides an automatic interface between spreadsheets and existing microcomputer and mainframe databases within a customer's institution. THE APPLICATION MANAGER - A scheduling and tracking system that manages the activities of the Judgment Processor and Information Manager. It integrates the entire COGENSYS Judgment Software line of products and provides query and management reports of the entire process. SERVICES The following is a description of the Company's principal services offerings: OUTSOURCING SERVICES - The Company offers comprehensive outsourcing services from its data centers located in North America, Europe and Australia. These services range from providing processing capabilities for unique, highly regulated lines of business such as Massachusetts automobile, Texas personal lines and automobile assigned risk plans; to providing complete processing capabilities for all or most of a customer's business by 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, including complete policyholder services and claims support. INFORMATION SERVICES - The Company offers a wide range of information services which are packaged to facilitate efficient review and use and may be ordered and received on an automated basis through the Company's nationwide telecommunications network using the Company's database products. These information services, which are designed to assist insurance professionals in making better decisions about risk selection, pricing and claims settlement, currently include motor vehicle reports (driving record), undisclosed driver information, driver mileage verification, claims histories, credit reports and histories, property inspection and valuation reports, property claims estimating, premium audits, physician reports and medical histories. PROFESSIONAL SERVICES - In addition to the services described above, the Company offers a full range of professional services to assist customers in attaining the most effective use of their systems. These services include systems implementation and integration assistance, consulting, education and project planning. PAGE <14> MARKETING AND CUSTOMERS The Company markets its products and services to several thousand property and casualty insurance companies, life insurance companies and health insurance organizations and independent agents and adjusters. In addition, the Company offers its software products and automation and administration support services in 24 foreign countries. At December 31, 1993, the Company was providing its information services to more than 9,000 insurance companies, agents and adjusters and had a total of over 3,000 software systems licenses in force. The Company markets its products and services through a staff of approximately 200 employees, including salesmen and marketing support personnel, most of whom are specialists in the insurance industry and data processing. The Company's marketing force works extensively with each prospective customer, analyzing its specific requirements. Consequently, this process may extend over several months for a prospective customer looking for a major automation, administration support or information solution. In addition to its own software products, the Company markets certain software products of other parties to its customers. Typically, these products are designed to perform noninsurance functions or to improve the control and productivity of computer resources. PAGE <15> LICENSING The Company's revenues are generated primarily by licensing to customers standardized insurance software systems and providing automation, administrative and information services to the insurance industry. Software systems are licensed under the terms of substantially standard nonexclusive and nontransferable license 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 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 any additions or modifications 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. Services availability allows customers access to professional services, other than maintenance and enhancements, which are provided under separate arrangements during the MESA term. The Company provides professional support services, including systems implementation and integration assistance and consulting and educational services, which are available under services agreements and charged for separately. These services are generally provided under time and material contracts and in some circumstances under fixed price arrangements. The Company also offers information and outsourcing services ranging from making available software licensed from the Company on a remote processing basis from the Company's data centers, to automated information services through the Company's North America telecommunications network using the Company's database products. Outsourcing services are typically provided under contracts having terms from three to ten years. PAGE <16> 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 comprehensive insurance software systems and automation and administration support and information services to the insurance industry. Insurers which internally develop systems similar to those of the Company, along with their affiliates, are not likely to become major customers of the Company for software. There are also a number of independent companies who offer software systems which perform certain, but not all of the functions performed by the Company's systems. There are a number of larger companies, including computer manufacturers, computer service and software companies and insurance companies, that have greater financial resources than the Company and the technological ability to develop software products similar to those offered by the Company. There are also a number of companies that provide information services similar to those provided by the Company to the insurance industry. These companies, especially the larger ones, present a significant competitive challenge to the Company's information services business. The Company competes on the basis of its service, price, system functionality and technological advances. However, the Company believes that the most important considerations for potential consumers of its products and services are product capability, ease of installation and use, reliability and quality of technical support, documentation and training, integration of the products and services capabilities and the experience and financial resources of the Company. PAGE <17> PRODUCT DEVELOPMENT The history of the computer software and services industry has seen rapid changes in hardware and software technology. These changes require the Company periodically to modify and enhance its product offerings in an effort to accommodate changes to, and to insure compatibility with, the latest hardware and software used by its customers. The Company continues to upgrade its products and add new features to meet the changing needs of its customers. An example of the Company's continuing product development efforts to ensure that it is in a position to meet the growing automation needs of the insurance industry is the Company's new generation of systems, Series III (see Products and Services, Software Products). The Company's efforts on Series III development have been further enhanced by IBM, pursuant to the Development and Marketing Agreement between the Company and IBM, providing the Company with certain machines, programs and services to assist in the continuance of the Company's conversion of its major insurance industry applications software to client/server/host architecture and the development of other insurance industry applications software. Although development efforts for the full release of Series III for the property and casualty insurance industry will continue, major components of Series III have been delivered since development began in 1987. While the Company intends to continue to develop applications for IBM architecture platforms, it also intends to support open systems. The first agreement to support open systems development is with NCR Corporation ("NCR"), an AT&T subsidiary. NCR, now known as AT&T Global Information Solutions ("AT&T Global") and the Company will jointly market the Company's Series III systems worldwide to insurance companies implementing AT&T's UNIX-based solutions. AT&T Global has provided a full range of scalable platforms to the Company. In addition, AT&T Global has made a commitment to support the marketing of the Series III software and to participate in the funding of the conversion of the Series III host-associated software to AT&T Global's UNIX-based platforms. AT&T has played a major role in the communications segment of the insurance industry and has a long-standing relationship with the Company. AT&T's acquisition of NCR, a leader in open systems computing, allows the Company to respond to these trends and meet the broader needs of the insurance industry. The agreement is initially focused on the property and casualty sector of the insurance industry. In an effort to maintain and strengthen its competitive position, the Company expends substantial amounts on internal product development. Expenditures for internal product development, PAGE <18> which were capitalized, were $24.7, $24.3 and $28.7 million in 1993, 1992 and 1991, respectively, representing 5.5%, 5.0% and 7.0%, respectively, of total revenues. In addition to its continuing development efforts, the Company has, in the past several years, expended significant amounts on business and software product acquisitions in an effort to expand its product and services offerings and its presence in the marketplace. The Company acquired software products with a cost basis of $25.1, $17.7 and $1.6 million in 1993, 1992 and 1991, respectively, representing 5.5%, 3.6% and .4%, respectively, of total revenues. The Company intends to continue to expand its product and services offerings through internal development and acquisitions. ITEM 2. PROPERTIES The Company owns its Columbia, South Carolina, headquarters complex and 145 acres of land on which the facility is located. In early 1993, the Company completed construction of a 176,000 square foot addition to its corporate headquarters costing $16,200,000. The Company leases space for its regional and branch offices under various leases. The Company, through its data centers located in North America, Europe and Australia, utilizes 12 mainframe computers. All computers are owned or held under long-term leases. In total, these computers have 5,232 megabytes of memory and are capable of processing approximately 621.6 million instructions per second. The Company is currently utilizing 75% to 80% of this capacity. ITEM 3. LEGAL PROCEEDINGS In April 1993, litigation was commenced against the Company and certain of its present and former officers and directors in the United States District Court for the District of South Carolina, Columbia Division. In the litigation, which is a class action on behalf of purchasers of the Company's common stock between March 18, 1992 and July 8, 1993, the plaintiffs allege that the Company failed to prepare its financial statements in accordance with generally accepted accounting principles and omitted to disclose certain information regarding, among other things, its business and prospects in violation of the Federal securities laws, the South Carolina Code and common law. The Company believes it has meritorious defenses to the claims and is vigorously defending the litigation. The Company is unable to predict the outcome or the potential financial impact of this litigation. PAGE <19> In June 1993, the Securities and Exchange Commission ("SEC") commenced a formal investigation into possible violations of the Federal securities laws in connection with the Company's public reports and financial statements, as well as trading in the Company's securities. The Company is cooperating with the SEC in connection with the investigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PAGE <20> EXECUTIVE OFFICERS OF THE REGISTRANT Name Age Position G. Larry Wilson 47 Chairman of the Board, President and Chief Executive Officer David T. Bailey 47 Executive Vice President Charles E. Callahan 45 Executive Vice President Donald A. Coggiola 54 Executive Vice President Robert L. Gresham 51 Executive Vice President Stephen G. Morrison 44 Executive Vice President, Secretary and General Counsel Timothy V. Williams 44 Executive Vice President and Chief Financial Officer Jeffrey S. Bragg 45 Senior Vice President James P. Brown 47 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 1995; Director of LEGENT Corporation, Vienna, Virginia. Employed by the Company since its inception. David T. Bailey - Executive Vice President of the Company since 1986. Responsible for the Property and Casualty Insurance Group. Employed by the Company since 1981. Charles E. Callahan - Executive Vice President of the Company since 1989. Responsible for the Life, Health and Information Services Group. Employed by the Company since 1983. Donald A. Coggiola - Executive Vice President of the Company since 1986. Responsible for the Industry Markets Group. Employed by the Company since 1979. Robert L. Gresham - Executive Vice President of the Company since 1986. Responsible for the Corporate Services Group. Employed by the Company since 1978. Stephen G. Morrison - Executive Vice President, Secretary and General Counsel of the Company since January 1994. Responsible for the administration of the legal affairs of the Company. Employed by the Company since January 1994. Prior to joining the Company, Mr. Morrison was engaged full time in the practice of law as Senior Partner with Nelson, Mullins, Riley & Scarborough in Columbia, South Carolina. In that capacity, Mr. Morrison served as the Company's chief outside litigation counsel for matters other than those described in Note 8 to the Financial Statements. Mr. Morrison will continue his affiliation with Nelson, Mullins, Riley & Scarborough and continue to perform certain services in that capacity on a declining basis. PAGE <21> Timothy V. Williams - Executive Vice President and Chief Financial Officer of the Company since February 1994. Responsible for the Financial Services Group. Employed by the Company since February 1994. Prior thereto, Mr. Williams served in senior management capacities with Holiday Inn Worldwide, based in Atlanta, Georgia, most recently as Executive Vice President of Corporate Services and Chief Financial Officer. Jeffrey S. Bragg - Senior Vice President of the Company since 1993. Responsible for the Health and Information Services Group. Employed by the Company since 1987. James P. Brown - Senior Vice President of the Company since 1992. Responsible for the Total Policy Management Group since February 1994. Employed by the Company since 1982. PAGE <22> 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. The following table sets forth for the calendar periods indicated the high and low market prices for the Company's common stock. 1993 High Low First Quarter............................. $87 1/4 $74 1/2 Second Quarter............................ 86 1/4 32 Third Quarter............................. 36 21 Fourth Quarter............................ 31 22 1/4 1992 High Low First Quarter............................. $73 $63 Second Quarter............................ 70 59 Third Quarter............................. 76 1/2 62 Fourth Quarter............................ 83 1/2 71 1/2 Title of Class Common Stock, $.01 par value Number of Record Holders as of March 11, 1994 1,584 PAGE <23> ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(Unaudited) (Unaudited) (Unaudited) (Restated) (Restated) (Restated) (Restated) Results of Operations 1993 1992 1991 1990 1989 (In Thousands, Except Per Share Data) Revenues...........................$453,099 $489,261 $411,156 $341,692 $262,271 Operating income (loss)............ (77,053) 78,971 63,659 51,207 43,046 Other income and expenses, net..... 10,656 11,792 9,117 4,222 2,257 Income (loss) before income taxes (benefit).................. (66,397) 90,763 72,776 55,429 45,303 Net income (loss)..................$(56,134) $ 61,522 $ 47,596 37,166 29,741 Net income (loss) per share........$ (2.46) $ 2.65 $ 2.21 $ 1.92 $ 1.77 Fully diluted net income per share............................ - - $ 2.14 $ 1.80 $ 1.66 Financial Condition Cash and equivalents and marketable securities............$156,772 $238,521 $197,414 $152,994 $143,834 Working capital.................... 206,756 286,687 232,245 200,098 193,808 Total assets....................... 659,803 706,942 632,692 529,249 476,580 Long-term debt (excludes current portion)................. 5,655 6,001 5,976 102,633 103,151 Total liabilities.................. 182,831 127,866 132,813 201,841 188,631 Stockholders' equity............... 476,972 579,076 499,879 327,408 287,949 The above data should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing in this Annual Report on Form 10-K.
PAGE <24> ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The consolidated balance sheet as of December 31, 1992 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended have been audited and are restated herein. The consolidated statements of operations, changes in stockholders' equity and cash flows for the year ended December 31, 1991 have been restated by the Company, without audit to conform to the adjustments to the Company's retained earnings as of December 31, 1991, as discussed in Note 2 of Notes to Consolidated Financial Statements. These adjustments include all adjustments which are, in the opinion of management, necessary to state fairly the results for the period presented. Results of Operations Revenues Total licensing revenues were $74.7, $73.0 and $76.0 million in 1993, 1992 and 1991, respectively, representing 16.5%, 14.9% and 18.5% of total revenues. Total licensing revenues for 1993 increased $1.7 million (2.3%) compared to 1992, due primarily to increased revenues from continuing monthly license charges for maintenance, system enhancements and services availability ("MESA") and for continuing right-to-use licenses of $2.7 million (6.0%) compared to 1992. This increase was partially offset by a reduction in initial license revenues related primarily to a decrease in both the life and health insurance systems businesses. However, the Company's property and casualty systems business experienced an increase in 1993 licensing revenues, compared to 1992. Total licensing revenues for 1992 decreased $3.0 million (3.9%) compared to 1991, due primarily to a reduction in initial license charges ($6.4 million) related primarily to a decrease in the property and casualty insurance systems business. This decrease was partially offset by an increase in MESA revenue and for continuing right-to-use licenses of $3.4 million. Total services revenues were $378.4, $416.3 and $335.2 million in 1993, 1992 and 1991, respectively, representing 83.5%, 85.1% and 81.5% of total revenues. Changes in the total services revenue decrease were affected by activities in professional, outsourcing and information services, as described more fully below. Revenues from professional services were $66.7 million for 1993, a decrease of $23.9 million (26.4%) compared to 1992. The decrease was primarily attributable to a decrease in services related to the Company's health insurance systems business. The Company originally forecasted 1993 health insurance systems annual revenues of approximately $78 million. However, PAGE <25> near the end of the second quarter of 1993, the Company projected that its annual health insurance systems business revenues would drop by approximately 50% from the revenue recorded in 1992 to approximately $33 million for all of 1993. The Company believes this decline was directly related to the significant restructuring proposals to the country's health care system and the unwillingness of insurers to make commitments for any significant new systems until the uncertainty regarding the ultimate outcome of reform was resolved. For a more detailed discussion of the effects of health care reform, see Costs and Expenses below. Revenues from outsourcing services were $116.9 million for 1993, a decrease of $49.4 million (29.7%) compared to 1992. The decrease was primarily attributable to the wind down of the New Jersey Market Transition Facility (MTF) project. Prior to the wind down of the MTF, annual MTF revenues in 1992 were approximately $68.4 million. Revenues decreased $48.7 million to $19.7 million for 1993 as the project came to an end. As a result of an increased role in servicing additional new contracts with insurance companies and residual markets, the Company will start to replace revenues, lost from the MTF, during the first half of 1994. The Company, in December 1993, signed one of the largest outsourcing agreements in its history. The Company contracted to provide data processing services for Vital Forsikring A.S., a life insurance company in Bergen, Norway; this contract, together with other outsourcing contract opportunities in Scandinavia, could generate revenues of up to approximately $150 million over the seven-year term of the agreement based on expected services utilization. Total revenues from professional and outsourcing services for 1992 were $256.9 million as compared with $185.9 million for 1991 (services were not segregated between professional and outsourcing prior to 1992). This $71.0 million increase is primarily attributable to policy management and processing services to the New Jersey Market Transition Facility (MTF) project, facilities management and outsourcing contracts in Europe and Australia, and several new outsourcing contracts in the United States. Revenues from information services were $191.7, $154.8 and $147.3 million for 1993, 1992 and 1991, respectively. The increase between these years is primarily attributable to the acquisition of PMS, Inc. (PMSI) of Waco, Texas, effective November 1, 1990 and to an increase in new business associated with automobile property and casualty information services and life information services. PMSI provides information services, particularly attending physician statements and personal medical history interviews primarily to life insurers throughout the United States. Increases related to this acquired business were $8.1 and $7.2 million for 1993 and 1992, respectively. These increases, however, were partially PAGE <26> offset by a reduction in property and casualty information services revenue associated with risk services. Costs and Expenses Although employee compensation and benefits remained relatively unchanged from 1992 to 1993, the Company did experience a reduction in compensation and other benefits resulting from a downsizing in the Company's health insurance systems staff. The Company, as part of its restructuring charges, decided to downsize its health staff from 437 at June 30, 1993 to approximately 388 at the end of 1993, with additional reductions in staff scheduled to take place during 1994 (see Note 13 of Notes to Consolidated Financial Statements). This decrease was partially offset by an increase in costs associated with the acquisition of CYBERTEK Corporation in August 1993, and the acquisition of a data center, including its workforce, in Bergen, Norway, in December 1993. Employee compensation and benefits expense increased $10.9 million for 1992 compared to 1991, primarily as a result of increased costs associated with European and Australian facilities management and outsourcing contracts. Computer and communications expenses increased $2.2 million to $41.9 million for 1993 compared to $39.7 million for 1992. This increase results primarily from increased costs associated with the acquisition of CYBERTEK Corporation and the acquisition of a data center in Bergen, Norway. Computer and communications expenses increased $8.9 million for 1992 compared to 1991. This increase was primarily related to increased costs associated with policy management and processing services, principally the MTF project, and to European and Australian facilities management and outsourcing contracts. Information services and data acquisition costs increased $37.5 million to $130.3 million for 1993 compared to $92.8 million for 1992; 1992 reflects an increase of $13.5 million compared to $79.3 million for 1991. These increases are due primarily to an increase in the volume of state fees for motor vehicle reports, related to new business, which is part of the Company's property and casualty information services business. Other operating costs and expenses for 1993 remained relatively unchanged from 1992. The Company did, however, in June 1993, record certain one-time charges related to early project terminations, the deductible under the Company's Directors' and Officers' liability insurance policy in response to shareholder litigation, cost overruns on certain projects and other charges arising from the Company's previously disclosed internal investigation of its accounting practices, amounting to $16.4 million. Partially offsetting these charges, other operating costs and expenses declined in 1993 as a result of a reduction in costs PAGE <27> associated with the wind down of the New Jersey MTF project and an increase in amounts capitalized principally related to the internal development of the Company's property and casualty and life software systems. The Company undertook an assessment of the potential impact on its health insurance systems business of proposed health care legislation, the rapidly evolving and significant changes in the relationship between health care providers and insurers, and the resultant changes in health insurers' software and service needs. As a result of its evaluation, the Company determined that there would be no market demand for many of its health insurance systems and automation support services, principally those designed for and suited to traditional health indemnity insurance plans. Near the end of the second quarter of 1993, it was clear that significant restructuring of the country's health care system would occur, whether by government action or economic circumstances, and consequently, insurers would be unwilling to make commitments for any significant new systems until the uncertainty regarding the ultimate outcome of reform was resolved. Furthermore, it seemed most likely that traditional indemnity plans would not meet the future needs of most employers and their insurers after such changes. After meetings in the second quarter and early third quarter of 1993 with its financial advisors, health care professionals and customers, the Company determined that it did not have some of the systems to respond to the most likely future initiatives in the health care insurance industry and that many of the Company's existing health insurance products, primarily those acquired in business acquisitions, would require substantial modification or complete reformation. This determination and the continuing adverse impact of operating losses in its health insurance systems business led the Company to the conclusion that the current carrying value of certain assets of the health insurance systems business unit, principally intangibles associated with traditional health indemnity insurance plan services, was not fully recoverable through sale or continuing operations. As a consequence of these factors, the Company recorded, at June 30, 1993, impairment charges to reduce the carrying value of certain identifiable intangible assets and goodwill related to its health insurance systems business of $54.9 million and restructuring charges of $25.2 million associated with employee severance and outplacement ($5.2 million), and to an ongoing lease obligation and/or termination for the planned future abandonment of certain leased office facilities ($20.0 million) (see Note 13 of Notes to Consolidated Financial Statements). As part of these non-cash impairment charges, acquired software amounting to $9.2 million was written-off. Principal products that supported traditional health indemnity insurance plans that were written-off included: (1) a claims administration and payment system; (2) an administrative system for membership, billing, collections and PAGE <28> receivables; and (3) a provider administration and reimbursement system. The reduction in annual amortization related to these software systems is approximately $2.6 million. Other non-cash impairment charges to write-off the carrying value of certain other identifiable intangibles ($6.3 million) and goodwill ($39.4 million) will result in future amortization reductions of approximately $3.8 million on an annual basis. Other operating costs and expenses for 1992 increased $29.4 million compared to 1991. This increase results primarily from increased costs associated with providing total policy management outsourcing services, principally the New Jersey MTF, and to European and Australian facilities management and outsourcing contracts. Operating Income Operating income was $79.0 and $63.7 million for 1992 and 1991, respectively, compared with an operating loss of $77.1 million for 1993. The operating loss for 1993 was after giving effect to special charges of $98.8 million relating to impairment and restructuring charges ($80.7 million) and charges principally arising from the Company's previously disclosed internal investigation of its accounting practices ($18.1 million). The Company completed its acquisition of CYBERTEK Corporation on August 24, 1993. CYBERTEK's revenues and net income for the last full year prior to acquisition were $30.7 million and $3.1 million, respectively. For 1993, the Company recognized revenues of $84.8 million and an operating loss of $12.9 million from its life insurance software, professional and information services business, which included the results of CYBERTEK since August 24, 1993. Of the loss, $1.7 million was attributable to amortization of intangible assets arising from the CYBERTEK acquisition. Also, the Company's decision to develop new releases of certain of its life systems based on the business functions of CYBERTEK software and the process of integrating CYBERTEK functionality into certain existing Series III applications, had the effect of significantly reducing revenues and increasing the operating loss from the life insurance services business in the short term. The information services business produced lower than expected operating profits for 1993, 1992 and 1991. The Company is attempting to direct more of its information services business into data base products and life information services, where margins are generally higher. The Company typically realizes a lower gross margin from information services than from software products and related services. The property and casualty insurance software and services business achieved increased levels of revenue and operating income, primarily from licensing activities in 1993. This operating income more than offset the losses in the health and life insurance services businesses during this period. Outsourcing services for PAGE <29> property and casualty insurers did not meet expectations in 1993 due to several contracts not closing or ramping up as fast as anticipated. The Company believes that this and the slowdown in second half licensing was largely due to the Company's delay in releasing the results of its special audit and having available audited financial statements. The Company recorded charges related to early project terminations, the deductible under the Company's Directors' and Officers' liability insurance policy in response to shareholder litigation, cost overruns on certain projects and other charges arising from the Company's previously disclosed internal investigation of its accounting practices. These charges totaled $18,100,000 (after tax $11,200,000). Effective January 1, 1993, the Company revised its estimate of the period of future benefit for goodwill and certain other acquired intangible assets. The effect of this change in accounting estimate was to increase amortization expense by $2.6 million during the twelve months ended December 31, 1993. Commencing January 1, 1993, the Company revised the period over which it will amortize its internally developed software. The effect of this change in estimated life was to decrease amortization expense by $1.8 million during the twelve months ended December 31, 1993 (see Note 1 of Notes to Consolidated Financial Statements). Investment income decreased $2.2 million for 1993 compared to 1992, as a result of a lower level of investable funds, resulting from large cash expenditures for the acquisition of CYBERTEK Corporation ($59.7 million) in August 1993, the repurchase in April 1993 of 970,668 shares of the Company's common stock ($48.7 million), and to a decrease in interest income related to long-term accounts receivable. Interest expense and other charges increased $1.3 million for 1993 compared to 1992, primarily as a result of the amortization of discounts associated with long-term restructuring liabilities recorded at June 30, 1993. These liabilities are part of restructuring charges established to recognize as a loss the planned future abandonment of certain facilities relating to the restructuring of the Company's health insurance systems business (see Note 13 of Notes to Consolidated Financial Statements). Interest expense decreased $2.7 million for 1992 compared to 1991 as a result of the redemption of the Company's $100 million, 5.5% Convertible Subordinated Debentures in May 1991. Interest expense relating to this debt was $2.2 million in 1991. The effective income tax (benefit) rate (income taxes expressed as a percentage of pre-tax income) was (15.5%), 32.2% and 34.6% for the years ended December 31, 1993, 1992 and 1991, PAGE <30> respectively. The effective income tax benefit rate for 1993 includes the impact of the increase in the highest marginal corporate tax rate resulting from the enactment of the Omnibus Budget Reconciliation Act of 1993. The effective tax benefit rate in 1993 is significantly lower than the statutory rate due to the nontaxable write-off of goodwill ($39.4 million) related to the impairment of the Company's health insurance systems business (see Note 13 of Notes to Consolidated Financial Statements). The decrease in the effective rate between 1992 and 1991 was due primarily to an increase in nontaxable investment income. PAGE <31> Liquidity and Capital Resources December 31, 1993 1992 (In Millions) Cash and equivalents and marketable securities.................................. $156.8 $238.5 Current assets................................ 287.7 343.9 Current liabilities........................... 81.0 57.2 Working capital............................... 206.7 286.7 Cash provided by operations................... 80.8 107.8 Cash used for investing activities............ (38.9) (127.4) Cash provided (used) by financing activities.. (49.8) 12.2 The Company's financial condition remained strong at December 31, 1993. Working capital was $206.7 million, including cash, cash equivalents and marketable securities of $156.8 million as compared to $238.5 million at December 31, 1992, a net decrease of $81.7 million. The principal factors affecting such net decrease were the acquisition of CYBERTEK Corporation in August 1993 for a total consideration of $59.7 million and the repurchase in April 1993 of 970,668 shares of the Company's common stock for total consideration of $48.7 million. Other significant expenditures during the period included: acquisition of data processing and communications equipment, support software and office furniture and equipment ($35.8 million); software product acquisitions and debt and contingency payments relating to past business acquisitions ($13.6 million); and completion of construction of additional office and dining facilities at the Company's corporate headquarters ($2.1 million). The Company completed the 1993 expenditures, including the repurchase of its shares and the acquisition for cash of CYBERTEK Corporation, without incurring any indebtedness. In August 1993, the Company completed its previously announced acquisition of CYBERTEK Corporation for total cash consideration of $59.7 million. As a result of acquiring CYBERTEK's broad based life insurance software systems, the Company changed certain development plans and, accordingly, $1.4 million of related deferred life insurance systems' costs were written-off for the year ended December 31, 1993. The Company is currently enhancing and integrating the business functions of CYBERTEK products with the Company's Series III life insurance applications and its Integrated Application Platform architecture. The Company expects this effort to continue through 1996 with the anticipated initial release of the integrated applications being made generally available in late 1994 or early 1995 with subsequent releases to follow. Total expenditures related to this effort are expected to approximate $34 million, of which $1.3 million was expended in 1993 and $8.5 million is anticipated for all of 1994. The Company PAGE <32> expects to generate savings through the closing of CYBERTEK's data center operations and other cost reductions. As described more fully above, the Company decided to restructure its health insurance systems business and take a restructuring charge of $25.2 million at June 30, 1993. Cash outlays with respect to the restructuring charges approximated $1.5 million during the year ended December 31, 1993 and approximately $15.2 million and $7.5 million are anticipated in 1994 and 1995, respectively. Significant expenditures anticipated for 1994, excluding any possible business acquisitions and stock repurchases, are as follows: acquisition of data processing and communications equipment, support software and office furniture, fixtures and equipment ($13.4 million); costs relating to the internal development of software systems ($35.8 million); and payments relating to past business acquisitions ($4.6 million). The Company has historically used the cash generated from operations for the following: development and acquisition of new products; acquisition of businesses; and repurchase of the Company's stock. The Company anticipates that it will continue to use its cash for all of these purposes in the future and that projected cash from operations will be able to meet presently anticipated needs; however, the Company may also consider incurring debt as needed to accomplish specific objectives in these areas and for other general corporate purposes. In May 1994, the Company expended $56.3 million for the repurchase of 2,278,537 of the 3,797,561 shares of common stock held by IBM and as of September 2, 1994, expended $22.2 million for the repurchase, on the open market, of 652,200 shares of its issued and outstanding common stock, pursuant to a stock repurchase program (see Note 16 of Notes to Consolidate Financial Statements). PAGE <33> Factors That May Affect Future Results The Company's future operating results may be affected by a number of factors, including uncertainties relative to economic conditions; industry factors; the Company's ability to develop and sell its products profitably; the Company's ability to successfully increase market share in its core business while expanding its product base into other markets; and the Company's ability to effectively manage expense growth relative to revenue growth in anticipation of continued pressure on gross margins. The Company's operating results could be adversely affected should the Company be unable to anticipate customer demand accurately, to introduce new products on a timely basis, or to effectively manage the impact on the Company of changes in the insurance marketplace. 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. 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 based upon the timing of the licensing of new systems. 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. Seasonality and Inflation The Company's operations have not proven to be significantly seasonal, although quarterly revenues and net income could be expected to vary at times. This is attributable principally to the timing of customers entering into license agreements with the Company and fluctuations in the amount of certain information services used by customers, principally during holiday seasons and periods of severe weather. The Company is unable to control the timing of these decisions or fluctuations. 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. PAGE <34> ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements and Supplementary Data Page Report of Independent Accountants........................ 35 Consolidated Financial Statements and Notes: Consolidated Statements of Operations for the years ended December 31, 1993, 1992 and 1991.............. 36 Consolidated Balance Sheets as of December 31, 1993 and 1992.......................... 37 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1993, 1992 and 1991.................... 38 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992 and 1991........ 39 Notes to Consolidated Financial Statements............. 40 Quarterly Consolidated Results of Operations............................................. 60 Supplemental Schedules: Schedule I - Marketable Securities..................... 62 Schedule V - Property and Equipment.................... 63 Schedule VI - Accumulated Depreciation and Amortization of Property and Equipment.............. 65 Schedule VIII - Valuation and Qualifying Accounts...... 67 Schedule X - Supplementary Income Statement Information............................... 68 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. PAGE <35> REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Policy Management Systems Corporation We have audited the accompanying consolidated balance sheets of Policy Management Systems Corporation and subsidiaries as of December 31, 1993 and 1992 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended December 31, 1993 and 1992. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As further discussed in Note 2 to the consolidated financial statements, management discovered certain errors in the Company's previously issued financial statements. Accordingly, the balance sheet as of December 31, 1992 and the consolidated statements of operations, changes in stockholders' equity and cash flows for the year ended December 31, 1992 have been restated to reflect the correction of these errors. In 1993 lawsuits were filed against the Company and certain of its present and former officers and directors alleging violation of securities laws as well as negligent misrepresentation. In addition, the Securities and Exchange Commission is conducting an investigation into possible violations of Federal securities laws. These issues are further discussed in Note 8 to the consolidated financial statements. Management cannot predict the ultimate impact of these actions on the consolidated financial statements. Accordingly, no provisions have been made in the consolidated financial statements. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Policy Management Systems Corporation and subsidiaries as of December 31, 1993 and 1992 and the results of their operations and their cash flows for the years ended December 31, 1993 and 1992 in conformity with generally accepted accounting principles. Atlanta, Georgia Coopers & Lybrand L.L.P. September 6, 1994 PAGE <36> POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 1993 1992 1991 (Restated) (Restated) (Unaudited) (In Thousands, Except Per Share Data) Revenues: Licensing.................................. $ 74,664 $ 73,007 $ 75,988 Services................................... 378,435 416,254 335,168 453,099 489,261 411,156 Costs and Expenses: Employee compensation and benefits......... 167,678 168,144 157,249 Computer and communications expenses....... 41,856 39,656 30,717 Information services and data acquisition costs........................ 130,267 92,827 79,282 Other operating costs and expenses......... 109,618 109,663 80,249 Impairment and restructuring charges....... 80,733 - - 530,152 410,290 347,497 Operating income (loss)...................... (77,053) 78,971 63,659 Other Income and Expenses: Investment income.......................... 9,898 12,073 11,715 Gain on sale of marketable securities...... 3,388 1,046 1,456 Interest expense and other charges......... (2,630) (1,327) (4,054) 10,656 11,792 9,117 Income (loss) before income taxes (benefit).. (66,397) 90,763 72,776 Income taxes (benefit)....................... (10,263) 29,241 25,180 Net income (loss)............................ $(56,134) $ 61,522 $ 47,596 Net income (loss) per share.................. $( 2.46) $ 2.65 $ 2.21 Weighted average number of shares............ 22,858 23,236 21,568 See accompanying notes.
PAGE <37> POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED BALANCE SHEETS
December 31, 1993 1992 (As Restated) (In Thousands, Except Share Data) Assets Current assets: Cash and equivalents............................................. $ 24,122 $ 31,959 Marketable securities............................................ 132,650 206,562 Receivables, net of allowance for uncollectible amounts of $1,817 ($1,630 at 1992).................................... 92,975 86,479 Income tax receivable............................................ 18,764 2,891 Deferred income taxes............................................ 9,491 8,083 Other............................................................ 9,735 7,939 Total current assets.......................................... 287,737 343,913 Property and equipment............................................. 139,029 131,696 Receivables........................................................ 4,716 22,252 Goodwill and other intangible assets............................... 85,969 100,792 Capitalized software costs......................................... 117,513 99,414 Deferred income taxes.............................................. 21,585 2,580 Other.............................................................. 3,254 6,295 Total assets.................................................. $659,803 $706,942 Liabilities Current liabilities: Accounts payable and accrued expenses............................ $ 42,256 $ 37,022 Accrued restructuring charges.................................... 9,521 - Accrued contract termination costs............................... 2,714 4,008 Current portion of long-term debt................................ 6,986 3,670 Unearned revenues................................................ 19,121 11,500 Other............................................................ 383 1,026 Total current liabilities..................................... 80,981 57,226 Long-term debt..................................................... 5,655 6,001 Deferred income taxes.............................................. 74,151 56,112 Accrued restructuring charges...................................... 19,735 - Other.............................................................. 2,309 8,527 Total liabilities............................................. 182,831 127,866 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, 22,637,021 shares issued and outstanding (23,524,197 at 1992)... 226 235 Additional paid-in capital......................................... 262,167 307,906 Retained earnings.................................................. 216,632 272,766 Foreign currency translation adjustment............................ (2,053) (1,831) Total stockholders' equity.................................... 476,972 579,076 Total liabilities and stockholders' equity................. $659,803 $706,942 See accompanying notes.
PAGE <38> POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Unrealized Addi- Foreign Loss on tional Currency Marketable Common Paid-In Retained Translation Equity Stock Capital Earnings Adjustment Securities Total (In Thousands) Balance, December 31, 1990, as previously reported.................... $194 $164,726 $160,783 $ - $ (1,160) $324,543 Effect of restatement attributable to prior years................ - - 2,865 - - 2,865 Balance, December 31, 1990, as restated (unaudited).................... 194 164,726 163,648 - (1,160) 327,408 Net income................................... - - 47,596 - - 47,596 Stock issued under incentive compensation plan.......................... - 1,522 - - - 1,522 Stock options exercised...................... 9 25,270 - - - 25,279 Conversion of convertible debentures......... 28 97,796 - - - 97,824 Increase in carrying value of noncurrent marketable equity securities............... - - - - 250 250 Balance, December 31, 1991, as restated (unaudited).................... 231 289,314 211,244 - (910) 499,879 Net income................................... - - 61,522 - - 61,522 Stock options exercised (469,483 shares)..... 4 18,592 - - - 18,596 Transfer of marketable equity securities to current portfolio....................... - - - - 910 910 Foreign currency translation adjustment...... - - - (1,831) - (1,831) Balance, December 31, 1992, as restated................................ 235 307,906 272,766 (1,831) - 579,076 Net loss..................................... - - (56,134) - - (56,134) Stock options exercised (21,777 shares)...... - 1,062 - - - 1,062 Repurchase of 970,668 shares of common stock. (10) (48,650) - - - (48,660) Issuance of stock to employee benefit plan (61,715 shares)....................... 1 1,849 - - - 1,850 Foreign currency translation adjustment...... - - - (222) - (222) Balance, December 31, 1993................... $226 $262,167 $216,632 $ (2,053) $ - $476,972 See accompanying notes.
PAGE <39> POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1993 1992 1991 (Restated) (Restated) (Unaudited) (In Thousands) Operating Activities Net income/(loss)...................................$(56,134) $ 61,522 $ 47,596 Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Depreciation and amortization..................... 63,157 51,104 41,538 Deferred income taxes............................. (2,997) 2,178 6,154 Gain on sale of marketable securities............. (3,388) (2,760) (1,456) Provision for uncollectible accounts.............. 1,768 712 - Impairment charges................................ 54,890 - - Changes in assets and liabilities: Accrued restructuring and lease termination costs. 25,843 - - Receivables....................................... 19,748 (11,878) (16,632) Income tax receivable............................. (15,873) (1,774) 3,961 Accounts payable and accrued expenses............. (1,460) (1,108) 6,033 Income taxes payable.............................. 1,327 160 (17) Other, net.......................................... (6,058) 9,675 (3,550) Cash provided by operations.................... 80,823 107,831 83,627 Investing Activities Proceeds from sales/maturities of marketable securities......................................... 382,973 208,563 118,052 Purchases of marketable securities..................(296,344) (252,046) (146,140) Acquisition of property and equipment............... (39,272) (56,011) (20,664) Capitalized internal software development costs..... (24,698) (24,344) (28,713) Purchased software.................................. (4,336) (5,702) (623) Proceeds from disposal of property and equipment.... 9,062 4,307 1,705 Business acquisitions............................... (66,261) (2,194) 9,215 Cash used for investing activities............. (38,876) (127,427) (85,598) Financing Activities Payments on long-term debt.......................... (3,681) (2,066) (3,169) Payments on capital lease obligations............... - (467) (1,887) Issuance of common stock under stock option plans... 690 14,692 18,725 Issuance of common stock to employee benefit plan... 1,850 - - Repurchase of outstanding common stock.............. (48,660) - - Cash provided (used) for financing activities.................................. (49,801) 12,159 13,669 Effect of exchange rate changes on cash............... 17 (213) - Net increase (decrease) in cash and equivalents....... (7,837) (7,650) 11,698 Cash and equivalents at beginning of period........... 31,959 39,609 27,911 Cash and equivalents at end of period.................$ 24,122 $ 31,959 $ 39,609 Noncash Activities Long-term debt arising from and assumed in connection with business acquisition...............$ 6,580 $ 2,187 $ 9,918 Reduction in long-term debt resulting from conversion of convertible debentures into common stock....................................... - - (99,983) Supplemental Information Interest paid....................................... 1,579 958 5,431 Income taxes paid................................... 13,431 25,126 11,033 See accompanying notes.
PAGE <40> 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 subsidiaries, all of which are wholly-owned. All material intercompany balances and transactions have been eliminated. Certain amounts previously presented in the consolidated financial statements for prior periods have been reclassified to conform to current classifications. The consolidated balance sheet as of December 31, 1992 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended have been audited and are restated herein. The consolidated statements of operations, changes in stockholders' equity and cash flows for the year ended December 31, 1991 have been restated by the Company, without audit, to conform to the adjustments to the Company's retained earnings as of December 31, 1991, as discussed in Note 2. These adjustments include all adjustments which are, in the opinion of management, necessary to state fairly the results for the period presented. Revenue Recognition The Company's revenues are generated primarily by licensing to customers standardized insurance software systems and providing automation and administrative support and information services to the insurance industry. Software systems are licensed under the terms of substantially standard nonexclusive and nontransferable license 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, which grants a right to use the software system currently available at the time the license is signed, is recognized as revenue upon delivery of the product and receipt of a signed contractual obligation. The monthly license charge 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 any additions or modifications 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 PAGE <41> and enhancements, which are provided under separate arrangements during the MESA term. The Company provides professional support services, including systems implementation and integration assistance and consulting and educational services, which are available under services agreements and charged for separately. These services are generally provided under time and material contracts and in some circumstances under fixed price arrangements. Under fixed price contracts, revenue is recognized on the basis of the estimated percentage of completion of service provided using the cost-to-cost method. Changes in estimates to complete and losses, if any, are recognized in the period in which they are determined. The Company also offers information and outsourcing services ranging from making available software licensed from the Company on a remote processing basis from the Company's data centers, to complete systems management, processing, administrative support and automated information services through the Company's nationwide telecommunications network using the Company's data base products. Outsourcing services are typically provided under contracts having terms from three to ten years. Revenues from substantially all outsourcing and information services are recognized at the time the service is performed. Marketable Securities Interest-bearing marketable securities are stated at amortized cost, which approximates market value. Current marketable equity securities are stated at the aggregate of lower of cost or market and a valuation allowance is provided for the excess, if any, of cost over market. The fair values of marketable securities are estimated based on quoted market prices for those or similar investments. Gains or losses on marketable securities are determined on the specific identification method. Investment securities with maturities of three months or less at the time of acquisition are considered cash equivalents. Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS 115), was issued in May 1993. FAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. FAS 115 is effective for fiscal years beginning after December 15, 1993; accordingly, the Company adopted provisions of FAS 115 on January 1, 1994. Adoption of FAS 115 is not anticipated to have a material impact on the financial statements taken as a whole. PAGE <42> Property and Equipment Property and equipment, including certain equipment acquired under capital leases and support software acquired for internal use, are stated at cost less accumulated depreciation and amortization. Property and equipment are depreciated on a straight-line basis over their estimated useful lives. Assets acquired under capital leases are amortized over the term of the related lease. Goodwill and Other Acquired Intangible Assets Since 1983, the Company has completed 34 business acquisitions, all of which have been recorded using the purchase method of accounting. As a result of purchase accounting, specifically 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 constant 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 based upon the latest available economic factors and circumstances. Additionally, the Company evaluates the full recoverability of all long-lived assets including specific intangible assets and goodwill based upon a comparison of discounted estimated future cash flows from the related operations with the then corresponding carrying values of those assets. A rate considered to be commensurate with the risk involved is used to discount the cash flows. For all years through December 31, 1992, the Company had amortized goodwill over an estimated useful life of 25 years. As a result of its most recent evaluation, the Company has revised its estimates of the period of future benefit for goodwill. Consequently, effective January 1, 1993, the Company began to amortize goodwill over an estimated life of 15 years for goodwill related to information and computer services company acquisitions and 10 years for goodwill related to software company acquisitions. The Company believes these new lives more appropriately reflect the current economic circumstances for such businesses and the related period of future benefit. Longer lives will be used for future business acquisitions only where independent third party studies support such lives. The effect of this change in accounting estimate was to increase amortization expense by $2.6 million during the year ended December 31, 1993. Also as part of this evaluation, the net book value of intangible assets related to the Company's health insurance services business of $45.7 million, most of which was goodwill, was written off during the twelve months ended December 31, 1993 (see Note 13). PAGE <43> Other identifiable purchased intangible assets are being amortized on a straight-line basis over their estimated period of benefit ranging from 5 to 10 years. Computer Software In accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed" (FAS 86), certain costs incurred in the internal development of computer software which is to be licensed to customers and costs of purchased computer software, consisting primarily of software acquired through business acquisitions, are capitalized and amortized 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 over the remaining estimated economic life of the product including the period being reported on. 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. All 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 $2.7, $13.3 and $10.9 million for the years ended December 31, 1993, 1992, and 1991, respectively. As part of the Company's restatement of its prior years' retained earnings (see Note 2), additional software costs in the cumulative amount of $30.5 million ($18.9 million net of tax) were capitalized as of December 31, 1992 ($28.3 million as of December 31, 1991). A detailed study of all software-related expenditures dating back to December 15, 1988 indicated significant misallocation and overexpensing of development costs. This error relating to under-capitalization of software development costs was due to certain weaknesses in the Company's then existing cost accounting and accumulation system which did not capture all appropriately capitalizable costs as defined in FAS 86. The additional capitalized costs include both elements of direct and indirect costs as described above as required by FAS 86. All of the additional capitalized software costs are related to the Company's property and casualty business software systems. Additional development costs relating to the Company's internally developed Series III life systems were not capitalized because all the conditions of FAS 86 were not met. No significant software development costs were capitalized for the Company's health insurance business since any such costs would have been written off as part of the impairment and restructuring charges (see Note 13). The additional capitalized software costs are reflected in the restated balances (see Note 7). PAGE <44> For all years through December 31, 1992, the Company amortized internally developed software on a straight-line basis over an estimated useful life of four years. The Company's recent experience indicates that an estimated useful life of five years would more appropriately reflect the actual useful life of such software. Accordingly, commencing January 1, 1993, the Company began to amortize such software on a straight-line basis over five years. Amortization charged to expense was $22.4, $20.3 and $18.4 million for the years ended December 31, 1993, 1992 and 1991, respectively; as a result of the change in estimated life described above, amortization expense was $1.8 million less than it would have been for 1993 using the previous four-year life. 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 bases 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. Net Income Per Share Net income per share is based upon the weighted average number of common shares outstanding. Outstanding stock options are common stock equivalents, but are excluded from the computation of net income per share since their dilutive effect is not material. Foreign Currency Translation The local currencies of the Company's foreign subsidiaries have been determined to be the 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 stockholders' equity. 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. PAGE <45> NOTE 2. RESTATEMENT OF PRIOR YEARS' RESULTS OF OPERATIONS In August 1993, the Company engaged independent accountants to conduct a special audit of the Company's consolidated financial statements as of and for the six months ended June 30, 1993. As a result of this audit, the Company determined that retained earnings previously reported as of December 31, 1992, required adjustment. These adjustments were due to errors in the application of accounting principles and subsequent discovery of facts existing at February 26, 1993, the date of the predecessor auditor's report. The components, net of related tax effects, of the cumulative adjustment to retained earnings as of December 31, 1992, are as follows: Increase (Decrease) to Retained Earnings (In Thousands) Elimination of revenue related to a contingent contract that was cancelled................... $ (820) Deferral of revenues due to changes in timing of revenue recognition.......................... (8,408) Reduction of expenses due to capitalization of certain software costs (see Note 1).......... 18,863 Recognition of expenses due to changes in timing of expense accrual...................... (1,622) Reserve for losses on certain services contracts................... (5,536) Reduction of current income tax liability due to previously unrecorded tax credits............... 2,580 Cumulative retained earnings adjustment as of December 31, 1992... $ 5,057 In February 1994, the Company engaged independent accountants to audit the Company's consolidated financial statements as of and for the twelve months ended December 31, 1993 and 1992. As a result of the 1992 audit, the Company determined the specific prior period or periods in 1992 affected by the above adjustments and also determined that retained earnings previously reported as of December 31, 1991 required adjustment. PAGE <46> The components (net of related tax effects) of the adjustment to previously reported net income for the year ended December 31, 1992, are as follows: Increase (Decrease) to Net Income (In Thousands) Elimination of revenue related to a contingent contract that was cancelled............... $ (820) Deferral of revenues due to changes in timing of revenue recognition...................... (2,331) Reduction of expenses due to capitalization of certain software costs (see Note 1)...... 1,557 Recognition of expenses due to changes in timing of expense accrual.................. 3,365 Reserve for losses on certain services contracts............... (2,179) Reduction of current income tax liability due to previously unrecorded tax credits........... 2,580 Net income adjustment for the year ended December 31, 1992..... $ 2,172 Adjustment per share............... $ .10 The components, net of related tax effects, of the cumulative adjustment to retained earnings as of December 31, 1991, are as follows: (Unaudited) Increase (Decrease) to Retained Earnings (In Thousands) Deferral of revenues due to changes in timing of revenue recognition.......................... $(6,077) Reduction of expenses due to capitalization of certain software costs (see Note 1).......... 17,306 Recognition of expenses due to changes in timing of expense accrual...................... (4,987) Reserve for losses on certain services contracts................... (3,357) Cumulative retained earnings adjustment as of December 31, 1991... $ 2,885 PAGE <47> The consolidated statements of operations, changes in stockholders' equity and cash flows for the year ended December 31, 1991 have been restated by the Company, without audit, to conform to the adjustments to the Company's retained earnings as of December 31, 1991, as discussed above. These adjustments include all adjustments which are, in the opinion of management, necessary to state farily the results for the period presented. The components (net of related tax effects) of the adjustment to previously reported net income for the year ended December 31, 1991, are as follows: Increase (Decrease) to Net Income (In Thousands) Deferral of revenues due to changes in timing of revenue recognition......... $(1,088) Reduction of expenses due to capitalization of certain software costs (see Note 1).................... 4,668 Recognition of expenses due to changes in timing of expense accrual.......... (364) Reserve for losses on certain services contracts............................. (3,196) Net income adjustment for the year ended December 31, 1991............... $ 20 The net income adjustment for the year ended December 31, 1991 had no effect on net income per share as previously reported. Deferral of revenues due to changes in timing of revenue recognition includes situations where: (i) there were errors in accounting for contracts under the percentage of completion method; (ii) there were delays in receiving signed contracts beyond December 31, 1992 and 1991; (iii) customers prepaid or were billed for services performed in subsequent periods or where refunds or provisions for credit were contractually required; and (iv) the Company had future delivery obligations under certain contracts. NOTE 3. ACQUISITION On August 24, 1993, the Company consummated the acquisition of all of the outstanding stock of CYBERTEK Corporation (CYBERTEK) for an aggregate consideration of $59.7 million in cash. CYBERTEK has over 20 years of experience in serving the data processing needs of the life insurance industry by designing and delivering a combination of data processing services, consulting services and software to enable its customers to manage their business. PAGE <48> The acquisition has been recorded using the purchase method of accounting. Accordingly, the consolidated statements of operations of the Company for the year ended December 31, 1993 include the results of operations of CYBERTEK only from the date of acquisition through period end. The impact of the acquisition on the consolidated results of operations for the year ended December 31, 1993 was not significant. The cost of acquisition was determined, and assigned to assets acquired, as follows: (In Thousands) Total consideration paid............... $58,152 Direct costs of acquisition............ 1,575 Total cost to be assigned to net assets acquired...................... 59,727 Add - Liabilities assumed.............. 13,876 Less - Cost assigned to tangible and identifiable intangible assets acquired (including $10,623 purchased software cost)............. 47,338 Cost assigned to goodwill.............. $26,265 NOTE 4. MARKETABLE SECURITIES Marketable securities consist of the following: December 31, 1993 1992 (In Thousands) Municipal bonds and notes.............. $127,505 $197,115 U.S. Government and Agency securities.. 4,795 9,072 Equity securities...................... 350 375 Total.............................. $132,650 $206,562 Market value........................... $134,983 $208,334 PAGE <49> NOTE 5. PROPERTY AND EQUIPMENT A summary of property and equipment is as follows:
Estimated December 31, Useful Life 1993 1992 (Years) (In Thousands) Cost: Land...................................... - $ 2,557 $ 2,557 Buildings and improvements................ 10-40 59,618 41,820 Construction in progress.................. - - 15,721 Leasehold improvements.................... 1-10 3,293 3,351 Office furniture, fixtures and equipment.. 5-15 37,630 30,370 Data processing and communications equipment and support software......... 2-5 134,552 116,135 Other..................................... 3-5 4,002 5,472 241,652 215,426 Less: Accumulated depreciation and amortization........................ (102,623) (83,730) Property and equipment..................... $139,029 $131,696
In mid-1991, the Company began construction of a 176,000 square foot addition to its corporate headquarters which was completed in early 1993 at a total cost of $16.2 million. Depreciation and amortization charged to expense was $27.2, $24.1 and $17.8 million for the years ended December 31, 1993, 1992 and 1991, respectively. NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS A summary of goodwill and other intangible assets is as follows: December 31, 1993 1992 (In Thousands) Goodwill.........................$ 76,500 $ 90,468 Customer lists................... 27,010 25,905 Covenants not to compete......... 4,956 4,486 Other............................ 3,653 9,268 112,119 130,127 Less: Accumulated amortization.. (26,150) (29,335) $ 85,969 $100,792 PAGE <50> Amortization charged to expense was $9.3, $8.4 and $7.1 million for the years ended December 31, 1993, 1992 and 1991, respectively. See Note 13 for a discussion of the write-off of certain impaired goodwill and other intangible assets. NOTE 7. CAPITALIZED SOFTWARE COSTS A summary of capitalized software costs is as follows: December 31, 1993 1992 (In Thousands) Internally developed software..... $124,326 $ 99,628 Purchased software................ 47,655 41,014 171,981 140,642 Less: Accumulated amortization... (54,468) (41,228) Capitalized software costs........ $117,513 $ 99,414 Purchased software in the amount of $9.2 million (which was net of $9.2 million of related amortization) was written off as part of the Company's impairment and restructuring charges relating to its health business (see Note 13). Also, $1.4 million relating to the nonrecoverability of certain deferred life insurance systems development costs was written off for the year ended December 31, 1993; this amount is also included in other operating costs and expenses in the accompanying consolidated statements of operations. NOTE 8. COMMITMENTS AND CONTINGENCIES Commitments 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 $7.7, $8.7 and $7.5 million for the years ended December 31, 1993, 1992 and 1991, respectively. Amounts of $7.8 million for lease termination costs and $12.2 million for lease abandonment charges are included in the impairment and restructuring charges in the accompanying statement of operations for the year ended December 31, 1993 (see Note 13). The Company leases certain data processing and related equipment primarily under operating leases expiring through 1995. Rent expense under operating leases for such equipment was $4.3, $4.3 and $1.0 million for the years ended December 31, 1993, 1992 and 1991, respectively. Future minimum lease obligations under noncancelable operating leases are stated below and include a lease termination payment in 1994 amounting to $7.8 million and payments over 10 years aggregating $17.6 million related to a leasehold planned for future abandonment (see Note 13): PAGE <51> Facilities Year Ending December 31, (In Thousands) 1994............................ $14,789 1995............................ 4,957 1996............................ 4,472 1997............................ 3,724 1998............................ 6,900 Thereafter...................... 11,672 Total............................. $46,514 Contingencies In April 1993, litigation was commenced against the Company and certain of its present and former officers and directors in the United States District Court for the District of South Carolina, Columbia Division. In the litigation, which is a class action on behalf of purchasers of the Company's common stock between March 18, 1992 and July 8, 1993, the plaintiffs allege that the Company failed to prepare its financial statements in accordance with generally accepted accounting principles and omitted to disclose certain information regarding, among other things, its business and prospects in violation of the Federal securities laws, the South Carolina Code and common law. The Company believes it has meritorious defenses to the claims and is vigorously defending the litigation. The plaintiffs seek unspecified compensatory damages, legal fees and litigation costs. The Company is unable to predict the outcome or the potential financial impact of this litigation. The maximum insurance coverage related to these claims is $15 million under the directors' and officers' insurance. In June 1993, the Securities and Exchange Commission (SEC) commenced a formal investigation into possible violations of the Federal securities laws in connection with the Company's public reports and financial statements, as well as trading in the Company's securities. The SEC has issued a formal order of investigation which provides the SEC staff with the power to subpoena documents and to compel testimony in connection with their investigation. The Company is cooperating with the SEC in connection with this investigation. NOTE 9. LONG-TERM DEBT Long-term debt is as follows: December 31, 1993 1992 (In Thousands) Notes payable, due through February 2015, interest at 3.69% to 9.00%................. $12,641 $ 9,671 Less: Current portion............ (6,986) (3,670) Long-term debt................... $ 5,655 $ 6,001 PAGE <52> NOTE 10. INCOME TAXES A reconciliation of the difference between the actual income tax provision (benefit) and the expected provision (benefit), computed using the applicable statutory rate is as follows: Year ended December 31, 1993 1992 1991 (Restated) (Restated) (Unaudited) Statutory Rate 35% 34% 34% (In Thousands) Income tax provision (benefit) computed at statutory rate.......$(23,239) $ 30,859 $ 24,744 Increase (decrease) in taxes due to: Goodwill......................... 15,205 1,094 1,119 Nontaxable investment income..... (2,391) (3,336) (2,823) State and local income taxes, net of federal tax effect...... (913) 489 2,140 Increase in statutory rate....... 1,080 - - Other............................ (5) 135 50 Actual income tax provision (benefit)..............$(10,263) $ 29,241 $ 25,180 Effective income tax provision (benefit) rate................... (15.5)% 32.2% 34.6% An analysis of the income tax provision (benefit) is as follows: Year ended December 31, 1993 1992 1991 (Restated) (Restated) (Unaudited) (In Thousands) Current taxes.....................$ (7,266) $27,063 $ 19,023 Deferred income taxes relating to temporary differences: Depreciation and amortization of property, equipment and intangibles................... 3,834 (1,907) (345) Capitalized internal software development costs........... 4,914 4,458 5,107 Restructuring of operations... (12,855) - - Other......................... 1,110 (373) 1,395 (2,997) 2,178 6,157 Total income tax provision (benefit).........$(10,263) $29,241 $25,180 PAGE <53> An analysis of the net deferred income tax liability is as follows: December 31, 1993 1992 (In Thousands) Current deferred assets: Net operating loss carryforward....... $4,315 $ 157 Other................................. 5,176 7,926 Current deferred assets............. 9,491 8,083 Long-term deferred assets: Restructuring of operations.......... 12,855 - State tax credits.................... 4,987 2,580 Other................................ 3,743 - Long-term deferred assets............ 21,585 2,580 Total deferred assets.............. $31,076 $10,663 Long-term deferred liabilities: Depreciation and amortization of property, equipment and intangibles.................... $28,272 $23,726 Capitalized internal software development costs.................. 32,971 28,073 Other................................ 12,908 4,313 Total deferred liabilities......... $74,151 $56,112 The Company generated a $10.9 million net operating loss for the year ended December 31, 1993 for tax purposes. This loss, which is anticipated to be carried forward, will expire in 2008. Additionally, the Company has loss carryforwards of $1.5 million at December 31, 1993 related to a business acquisition in 1991. The acquired loss carryforwards are subject to a $.4 million annual limitation and will expire in 2002. The entire benefit related to the Company's loss carryforwards has been recognized in the consolidated financial statements. On August 10, 1993 the Omnibus Budget Reconciliation Act of 1993 was signed into law. This Act increased the highest marginal federal income tax rate from 34 percent to 35 percent. Under the provisions of FAS 109, deferred tax liabilities and assets are adjusted for the effect of a change in tax laws or rates. Furthermore, the effect is included in the income tax provision for the reporting period that includes the enactment date. As such, the net loss for the period ended December 31, 1993 was increased by $1.1 million to reflect the increase in tax rates. In 1992, the Internal Revenue Service completed an examination of the Company's consolidated federal income tax returns for the years 1985 through 1988 and has proposed certain adjustments to income and credits that result in proposed tax deficiencies in the amount of $17.8 million for those years. The Company believes that PAGE <54> its judgment in the areas for which adjustments have been proposed has been appropriate and is contesting the proposed adjustments. The Company believes that adequate amounts of federal income taxes are provided in the consolidated financial statements. NOTE 11. EMPLOYEE BENEFIT PLANS Profit Sharing Retirement Plan Eligible employees of the Company are covered under the Company's profit sharing retirement plan. The Company's contribution to the plan is determined by the Board of Directors of the Company. Employees make no contributions to this plan. The Company made contributions of $.8 million in early 1993 and $.7 million in early 1992 for the plan years 1992 and 1991, respectively. No contribution was made for 1993. Retirement Savings Plan The Company offers a 401(k) retirement savings plan for eligible employees. Participants can elect to have up to 6% of their salary withheld for investment in the program and the Company will make a matching contribution of $.50 for each $1.00 of employee participation. Participants may also make limited additional contributions which are not subject to matching contributions by the Company. Participants have several options as to how their contributions may be invested, but through October 1993, all matching contributions had been invested in common stock of the Company. Company contributions made after October 1993 were, and continue to be, invested in a government money market fund, except as participants may otherwise redirect such Company contributions previously made. Except in certain instances, participant contributions are made from pre-tax wages. The Company's contribution on behalf of participating employees was $1.9, $1.9 and $1.7 million for the years ended December 31, 1993, 1992 and 1991, respectively. Stock Option Plans The Company has various 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. In 1992, options were granted under the 1989 Stock Option Plan to eligible employees and members of the Board of Directors, subject to approval by the Company's stockholders of an amendment to increase the number of shares available for grant under that plan. In January 1993, options were also granted under the Company's 1993 Long-Term Incentive Plan for eligible executives, subject to approval by the Company's stockholders. At the annual meeting of the Company's stockholders in April 1993, the amendment to the 1989 Stock Option Plan and the 1993 Long-Term Incentive Plan for Executives were approved. PAGE <55> Option activity under all of the stock option plans is summarized as follows: Year Ended December 31, 1993 1992 1991 (Unaudited) Shares under option at beginning of year.......................1,202,856 1,295,297 1,789,938 Granted.......................... 592,500 396,300 390,200 Exercised........................ (21,777) (469,483) (823,665) Forfeited........................ (48,460) (19,258) (61,176) Shares under option at end of year....................1,725,119 1,202,856 1,295,297 Shares under option exercisable at end of period............... 766,805 443,297 569,759 Shares available for future grant...................1,175,916 996,939 74,565 The exercise price of options exercised under plans other than under the 1993 Long-Term Incentive Plan for Executives during the years ended December 31, 1993, 1992 and 1991, were $15.13 to $49.63 and the exercise prices of shares under option at December 31, 1993, 1992 and 1991, other than under the 1993 Long-Term Incentive Plan for Executives, were $15.13 to $69.38. All options granted under plans other than under the 1993 Long-Term Incentive Plan for Executives have exercise prices at 100% of market value at date of grant and are exercisable at the rate of 33 1/3% per year (cumulative) beginning one year from date of grant. Options granted in 1993 under the 1993 Long-Term Incentive Plan for Executives have been granted at 105% of market value at the date of grant; all these options have an exercise price of $81.90. (For individuals who later may be selected to participate in the 1993 Long-Term Incentive Plan for Executives, said percentage is based on the year the individual is selected as follows: 1993 - 105%; 1994 - 104%; 1995 - 103%; 1996 - 102%; 1997 - 101%; and 1998 - 100%.) Options granted under the plan in 1993 become exercisable as follows: 25% on January 1, 1995; 25% on January 1, 1997; and 50% on January 1, 1999. For individuals who later may be selected to participate in the plan, the number of options granted and what percentage become exercisable on the above dates are determined according to formulas described in the plan. PAGE <56> NOTE 12. CERTAIN TRANSACTIONS In August 1989, International Business Machines Corporation ("IBM") acquired directly from the Company a 19.8% interest in the Company's outstanding voting stock for $116.8 million representing 3,797,561 shares. IBM was entitled to increase its ownership interest up to a maximum of 30% by purchasing the Company's common stock in the open market. IBM's ownership interest was 16.8% at December 31, 1993, representing the original 3,797,561 shares acquired (see Note 16). Certain officers of the Company participated in the Company's Long-Term Incentive Plan for executives, which began January 1, 1987 and ended December 31, 1992. The plan provided for the payment of pre-established bonuses, payable either in cash, common stock of the Company or a combination thereof, if certain earnings per share performance goals were reached by the Company during the six-year life of the plan. Bonuses earned under this plan for the final two-year period ended December 31, 1992, were paid in 1993, in a combination of $5.4 million in cash and 45,348 shares of common stock. On April 7 and 8, 1993, the Company repurchased, on the open market, all of the 970,668 shares of the Company's common stock authorized under a previously approved stock repurchase program for a total consideration of $48.7 million. NOTE 13. IMPAIRMENT AND RESTRUCTURING CHARGES During the first half of 1993, the Company experienced markedly decreased revenues from its health insurance services business unit. Near the end of the second quarter of 1993, the Company projected that its annual health insurance services business revenues would drop by approximately 50% from the revenue recorded in 1992 to approximately $33 million for all of 1993, and that trend of decline would continue into 1994. To better understand both the cause and the anticipated duration of this decline, the Company then undertook an assessment of the potential impact on its health insurance systems business of proposed health care legislation, rapidly evolving and significant changes in the relationship of health care providers and insurers, and the resultant changes in health insurers' software and service needs. After meetings with its financial advisors, health care professionals and customers, the Company determined that it did not have some of the systems to respond to the most likely future initiatives in the health care insurance industry and that many of the Company's existing health insurance services products, primarily those acquired in business acquisitions, would require PAGE <57> substantial modification or complete reformation. This determination and the continuing adverse impact of operating losses in its health insurance systems business led the Company to the conclusion that the current carrying value of certain assets of the health insurance systems business unit, principally intangibles associated with traditional indemnity insurance plan services, was not fully recoverable through sale or continuing operations. Accordingly, the Company recorded an impairment charge of $54.9 million at June 30, 1993 to reduce the carrying value of certain long-lived identifiable intangible assets ($6.3 million - customer lists, covenants not to compete and assembled workforce), acquired software ($9.2 million) and goodwill ($39.4 million) related to its health business. The Company applied its methodology for determining impairment of intangibles (see Note 1) by discounting the expected future cash flows from this business. In this case, the present value of the expected cash flows was determined using a discount rate of 17% which the Company considers to be commensurate with the risk involved. This rate was determined using the Capital Asset Pricing Model which reflects the return the Company should achieve on its investments. An additional risk premium was included in the rate to recognize the uncertainty associated with the health insurance services business. Additionally, as a result of the impairment of its health business, the Company decided to restructure this business and recorded a restructuring charge of $25.2 million at June 30, 1993. Costs to restructure the health insurance services business are composed of $5.2 million associated with employee severance and outplacement, and $20.0 million related to an ongoing lease obligation and/or termination for the planned future abandonment of certain leased office facilities. The Company also recorded other pre-tax restructuring charges of $.6 million. It is anticipated that these restructurings will be completed during 1994. NOTE 14. SEGMENT INFORMATION The Company operates in one business segment, providing computer software systems and related automation and administrative support and information services to the insurance industry. Approximately 90% of the Company's revenues are generated from products and services provided in the United States and no one customer accounted for more than 10% of revenues during the year ended December 31, 1993. PAGE <58> NOTE 15. CONCENTRATION OF CREDIT RISK 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 and 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 are 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 condition, but generally does not require collateral to support customer receivables. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. NOTE 16. SUBSEQUENT EVENTS In July 1994, the Company received a decision from an international arbitration tribunal relating to a contract termination dispute, finding that both parties were responsible. The Company has made provision (at June 1994) for satisfaction of the award in the amount of $1.9 million. The Company announced on April 27, 1994, that it had agreed with IBM to repurchase 2,278,537 of the 3,797,561 shares of the Company's common stock held by IBM and that the remainder of the Company's shares owned by IBM would be purchased by the General Atlantic Partners group, a New York-based private investment firm. The Company completed the repurchase of these shares on May 16, 1994, at a share price of $24.71, which approximated an aggregate cash expenditure of $56.3 million. The shares repurchased by the Company represent 10% of its total shares outstanding prior to the repurchase. Pursuant to a stock repurchase program approved by the Board of Directors in July 1994, the Company may purchase from time to time up to 2.5 million shares of its issued and outstanding common stock. This program is flexible as to the timing and method of acquisition of these shares. As of September 2, 1994, the Company had repurchased, on the open market, 652,200 shares of its common stock for a total of $22.2 million. PAGE <59> In addition to the litigation described in Note 8, the Company is presently involved in litigation and a contract dispute arising out of the Company's change in the direction of its future life software systems development following the acquisition of CYBERTEK. 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 these matters could affect 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 or results of operations. The Company, however, is unable to predict the ultimate outcome or the potential financial impact of these matters. PAGE <60> QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (Unaudited) First Second Third Fourth Quarter Quarter Quarter Quarter (In Thousands, Except Per Share Data) 1993 (Restated First Quarter Only): Revenues............................ $119,215 $116,708 $108,885 $108,291 Operating income (loss)............. 15,317 (97,465) 752 4,343 Other income and expenses, net...... 5,926 2,015 1,333 1,382 Income (loss) before income taxes (benefit)................... 21,243 (95,450) 2,085 5,725 Net income (loss)................... $ 13,625 $(74,048) $ 346 $ 3,943 Net income (loss) per share......... $ .58 $ (3.27) $ .02 $ .17 1992 (Restated): Revenues............................ $117,448 $121,239 $124,086 $126,488 Operating income.................... 17,713 20,222 20,849 20,187 Other income and expenses, net...... 2,793 2,840 3,212 2,947 Income before income taxes.......... 20,506 23,062 24,061 23,134 Net income.......................... $ 13,840 $ 15,485 $ 16,143 $ 16,054 Net income per share................ $ .60 $ .67 $ .69 $ .69 1992 (As Previously Reported): Revenues............................ $116,078 $123,119 $126,371 $131,544 Operating income.................... 18,324 19,326 20,147 21,744 Other income and expenses, net...... 2,784 2,809 3,215 3,075 Income before income taxes.......... 21,108 22,135 23,362 24,819 Net income.......................... $ 13,715 $ 14,395 $ 15,168 $ 16,072 Net income per share................ $ .59 $ .62 $ .65 $ .69 In August 1993, the Company engaged independent accountants to conduct a special audit of the Company's balance sheet as of December 31, 1992 and its consolidated financial statements as of and for the six months ended June 30, 1993. As a result of this audit, the Company determined that retained earnings previously reported as of December 31, 1992 required adjustment. These adjustments were due to errors in the application of accounting principles and subsequent discovery of facts existing at February 26, 1993, the date of the predecessor auditor's report. In February 1994, the Company engaged independent accountants to audit the Company's consolidated financial statements as of and for the twelve months ended December 31, 1993 and 1992. The Company has determined the specific prior periods affected by these adjustments and has restated its financial statements for such periods (see Note 2 of Notes to Consolidated Financial Statements). PAGE <61> The results of operations for the three months ended June 30, 1993 reflect special impairment and restructuring charges of $80.7 million (after taxes, $65.0 million, or $2.87 per share). See Note 13 of Notes to Consolidated Financial Statements. Additionally, the Company recorded charges related to early project terminations, the deductible under the Company's Directors' and Officers' liability insurance policy in response to shareholder litigation, costs overruns on certain projects and other charges arising from the Company's previously disclosed internal investigation of its accounting practices of approximately $.5 million (after taxes $.3 million, or $.01 per share) and approximately $17.6 million (after taxes $10.9 million, or $.48 per share), for the three months ended March 31, and June 30, 1993, respectively. PAGE <62> SCHEDULE I POLICY MANAGEMENT SYSTEMS CORPORATION MARKETABLE SECURITIES December 31, 1993 Maturity Amortized Market Book Description Value Cost Value Value (In Thousands) 3.24% - 11.0% Municipal bonds and notes, maturing on various dates through December 1998 (all rated AA- or better)........ $122,189 $127,505 $129,702 $127,505 5.29% - 9.50% U.S. Government and Agency securities, maturing on various dates through November 1994............................. 4,698 4,795 4,931 4,795 200,000 shares, The Seibels Bruce Group, Inc. common stock, par value $1 per share........... - - 350 350 $126,887 $132,300 $134,983 $132,650 PAGE <63> SCHEDULE V POLICY MANAGEMENT SYSTEMS CORPORATION PROPERTY AND EQUIPMENT Balance Addi- At tions Other Balance Beginning At Retire- Changes At End of Year Cost ments (1) of Year (In Thousands) Year ended December 31, 1993: Land and improvements...... $ 2,557 $ - $ - $ - $ 2,557 Buildings.................. 41,820 1,347 - 16,451 59,618 Construction in progress... 15,721 730 - (16,451) - Leasehold improvements..... 3,351 269 (682) 355 3,293 Office furniture, fixtures and equipment... 30,370 5,987 (201) 1,474 37,630 Data processing and communications equipment and support software..... 116,135 29,983 (14,689) 3,123 134,552 Other...................... 5,472 956 (2,206) (220) 4,002 $215,426 $39,272 $(17,778) $ 4,732 $241,652 Year ended December 31, 1992: Land and improvements...... $ 2,557 $ - $ - $ - $ 2,557 Buildings.................. 41,680 157 - (17) 41,820 Construction in progress... 6,277 9,444 - - 15,721 Leasehold improvements..... 2,718 1,012 (542) 163 3,351 Office furniture, fixtures and equipment... 27,612 2,451 (558) 865 30,370 Data processing and communications equipment. 108,321 27,146 (18,225) (1,107) 116,135 Other...................... 5,095 1,901 (1,513) (11) 5,472 $194,260 $42,111 $(20,838) $ (107) $215,426 Note (1) Includes assets acquired through business acquisitions, foreign currency translation adjustments, transfers and other adjustments. PAGE <64> POLICY MANAGEMENT SYSTEMS CORPORATION PROPERTY AND EQUIPMENT (RESTATED) (UNAUDITED) Balance Addi- At tions Other Balance Beginning At Retire- Changes At End of Year Cost ments (1) of Year (In Thousands) Year Ended December 31, 1991: Land and improvements...... $ 2,557 $ - $ - $ - $ 2,557 Buildings.................. 40,964 720 (3) (1) 41,680 Construction in progress... 110 6,167 - - 6,277 Leasehold improvements..... 2,671 47 - - 2,718 Office furniture, fixtures and equipment... 25,398 2,331 (97) (20) 27,612 Data processing and communications equipment and support software..... 88,253 26,147 (10,143) 4,064 108,321 Other...................... 5,377 153 (557) 122 5,095 $165,330 $35,565 $(10,800) $4,165 $194,260 Note (1) Includes assets acquired through business acquisitions, foreign currency translation adjustments, transfers and other adjustments. PAGE <65> SCHEDULE VI POLICY MANAGEMENT SYSTEMS CORPORATION ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT Balance Addi- At tions Other Balance Beginning To Retire- Changes At End of Year Expense ments (1) of Year (In Thousands) Year ended December 31, 1993: Buildings.................. $ 7,618 $ 1,699 $ - $ - $ 9,317 Leasehold improvements..... 1,838 349 (349) - 1,838 Office furniture, fixtures and equipment... 15,418 2,832 (175) 8 18,083 Data processing and communications equipment and support software..... 55,417 21,719 (7,189) 167 70,114 Other...................... 3,439 585 (493) (260) 3,271 $83,730 $27,184 $ (8,206) $ (85) $102,623 Year ended December 31, 1992: Buildings.................. $ 6,414 $ 1,203 $ - $ - $ 7,617 Leasehold improvements..... 1,843 495 (506) (8) 1,824 Office furniture, fixtures and equipment... 13,102 2,590 (528) 269 15,433 Data processing and communications equipment and support software..... 50,736 19,346 (14,270) (396) 55,416 Other...................... 4,257 475 (1,289) (3) 3,440 $76,352 $24,109 $(16,593) $(138) $ 83,730 Note (1) Includes foreign currency translation adjustments, transfers and other adjustments. PAGE <66> POLICY MANAGEMENT SYSTEMS CORPORATION ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT (RESTATED) (UNAUDITED) Balance Addi- At tions Other Balance Beginning To Retire- Changes At End of Year Expense ments (1) of Year (In Thousands) Year ended December 31, 1991: Buildings.................. $ 5,228 $ 1,189 $ (3) $ - $ 6,414 Leasehold improvements..... 1,354 450 - 39 1,843 Office furniture, fixtures and equipment... 11,087 2,274 (10) (249) 13,102 Data processing and communications equipment and support software..... 45,938 13,443 (8,657) 12 50,736 Other...................... 4,298 491 (538) 6 4,257 $67,905 $17,847 $ (9,208) $(192) $ 76,352 Note (1) Includes foreign currency translation adjustments, transfers and other adjustments. PAGE <67> SCHEDULE VIII POLICY MANAGEMENT SYSTEMS CORPORATION VALUATION AND QUALIFYING ACCOUNTS Additions Balance Charged at to Balance Beginning Costs & (1) at End Description of Period Expenses Other Deductions of Period (In Thousands) Allowance for uncollectible amounts Year ended December 31, 1993 $1,630 1,768 601 (2,182) $ 1,817 Accrued restruct - -uring and lease termination cost Year ended December 31, 1993 $ 0 29,696 0 (440) $29,256 Note (1) Acquired through business acquisition. PAGE <68> SCHEDULE X POLICY MANAGEMENT SYSTEMS CORPORATION SUPPLEMENTARY INCOME STATEMENT INFORMATION Year ended December 31, 1993 1992 1991 (Restated) (Restated) (Unaudited) (In Thousands) Amortization of intangible assets: Computer software................$24,844 $22,068 $19,225 Intangible assets from business acquisitions................... 9,274 8,527 7,137 Maintenance and repairs............ 8,118 8,558 4,646 $42,236 $39,153 $31,008 PAGE <69> ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Item 4 of the Company's Report on Form 8-K, dated August 17, 1993, is incorporated herein by reference. 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 "Election of Directors" in the Company's 1994 Proxy Statement and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The section of the Company's 1994 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 1994 Proxy Statement titled "Principal Stockholders" and "Election of Directors" are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section of the Company's 1994 Proxy Statement titled "Certain transactions" is incorporated herein by reference. PAGE <70> 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 34. 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, 1993 is incorporated herein by reference. Form 8-K The Company filed a report on Form 8-K, dated December 8, 1993 under Item 5. Other events, relating to a letter issued to the Company's stockholders, customers and employees, advising them of recent developments in connection with the Company's audit and its business. PAGE <71> REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Stockholders Policy Management Systems Corporation Our report, which includes two emphasis paragraphs discussing errors in previously issued financial statements and litigation and a Securities and Exchange Commission investigation, on the consolidated financial statements of Policy Management Systems Corporation and subsidiaries is included on page 35 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related 1993 and 1992 financial statement schedules listed in the index on page 34 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects, the information required to be included therein. Atlanta, Georgia Coopers & Lybrand L.L.P. September 6, 1994 PAGE <72> 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 Timothy V. Williams, Executive Vice President, Chief Financial Officer DATE November 16, 1994 BY (SIGNATURE) /s/ Stan F. Stoudenmire Stan F. Stoudenmire, Vice President and Corporate Controller DATE November 16, 1994 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, President and Chief Executive Officer DATE November 16, 1994 BY (SIGNATURE) /s/ Roy L. Faulks (NAME AND TITLE) Roy L. Faulks, Vice Chairman of the Board of Directors DATE November 16, 1994 BY (SIGNATURE) /s/ John P. Seibels (NAME AND TITLE) John P. Seibels, Director DATE November 16, 1994 BY (SIGNATURE) /s/ Frederick B. Karl (NAME AND TITLE) Frederick B. Karl, Director DATE November 16, 1994 BY (SIGNATURE) /s/ Richard G. Trub (NAME AND TITLE) Richard G. Trub, Director DATE November 16, 1994 PAGE <73> SIGNATURES BY (SIGNATURE) /s/ Joseph D. Sargent (NAME AND TITLE) Joseph D. Sargent, Director DATE November 16, 1994 BY (SIGNATURE) /s/ Dr. John M. Palms (NAME AND TITLE) Dr. John M. Palms, Director DATE November 16, 1994 BY (SIGNATURE) Did not sign. (NAME AND TITLE) Joseph M., Director DATE November 16, 1994 BY (SIGNATURE) Did not sign. (NAME AND TITLE) Steven A. Denning, Director DATE November 16, 1994 EX-99 2 PAGE <1> POLICY MANAGEMENT SYSTEMS CORPORATION EXHIBIT INDEX Exhibit Number 22. SUBSIDIARIES OF THE REGISTRANT (Filed herewith) 24. CONSENTS OF EXPERTS AND COUNSEL Consent of Coopers & Lybrand (Filed herewith) EX-22 3 PAGE <1> EXHIBIT 22 LIST OF SUBSIDIARIES OF POLICY MANAGEMENT SYSTEMS CORPORATION (Jurisdiction of Incorporation) Policy Management Systems Canada, Ltd. (Canada) Policy Management Systems International, Ltd. (Delaware) Policy Management Corporation (South Carolina) Policy Management Systems Netherlands B.V. (The Netherlands) Policy Management Systems (Barbados), Ltd. (Barbados) Policy Management Systems Europe, Limited (England) P.M.S., Inc. d/b/a Telepro, Telefacts and Legal Facts (Texas) Policy Management Systems Australia Pty. Limited (Australia) Policy Management Systems Information and Administration Services, Inc. (South Carolina) Portsmouth I.T. Services Limited (England) Policy Management Systems (Germany) GmbH (Germany) Policy Management Systems Life, Inc. (South Carolina) Policy Management Systems Osterreich GmbH (Austria) Policy Management Systems Investment, Inc. (Delaware) Medical Correspondence Service, Inc. (Georgia) CYBERTEK Management Services, Inc. (California) CYBERTEK Corporation (Texas) CYBERTEK Computer Products International, Inc. (California) CYBERTEK Agency Services, Inc. (Texas) CYBERTEK LAN Software, Inc. (California) PAGE <2> CYBERTEK Solutions, Inc. (Texas) CYBERTEK-Cogensys, Inc. (Delaware) Policy Management Systems Norden A.S. (Norway) Myers and Boles Corporation (California) EX-24 4 PAGE <1> EXHIBIT 24 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Policy Management Systems Corporation ("Company") on Form S-8 (Nos. 33-33848, 33-35002 and 33-35917) of our report, which includes two emphasis paragraphs discussing errors in previously issued financial statements and litigation and a Securities and Exchange Commission investigation, dated April 5, 1994 on our audits of the consolidated financial statements and financial statement schedules of the Company as of December 31, 1993 and 1992, and for the twelve months ended December 31, 1993, which report is included in this Annual Report on Form 10-K. Atlanta, Georgia Coopers & Lybrand April 5, 1994 -----END PRIVACY-ENHANCED MESSAGE-----