-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FTdQrNsVrQr1iL4uFAYf4SPlRiuqe9ssrrGixt4evlGUZOtMIvamTf7wcVemHCQ4 efei8L/4Yf77Vk2bngB8Vw== 0000356226-98-000001.txt : 19980326 0000356226-98-000001.hdr.sgml : 19980326 ACCESSION NUMBER: 0000356226-98-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLICY MANAGEMENT SYSTEMS CORP CENTRAL INDEX KEY: 0000356226 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 570723125 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10557 FILM NUMBER: 98572972 BUSINESS ADDRESS: STREET 1: ONE PMS CTR STREET 2: PO BOX TEN CITY: COLUMBIA STATE: SC ZIP: 29202 BUSINESS PHONE: 8037354000 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 1997 Commission file number 1-10557 POLICY MANAGEMENT SYSTEMS CORPORATION (Exact name of registrant as specified in its charter) SOUTH CAROLINA 57-0723125 (State or other jurisdiction of (IRS Employer Incorporation or organization) Identification No.) ONE PMSC CENTER (PO BOX TEN) BLYTHEWOOD, SC (COLUMBIA, SC) 29016 (29202) (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (803) 333-4000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x --- The aggregate market value of the voting stock held by non-affiliates of the registrant was $1,333,834,259 at March 17, 1998, 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 17, 1998, was 18,387,185. DOCUMENTS INCORPORATED BY REFERENCE Specified sections of the registrant's 1998 Proxy Statement in connection with its 1998 Annual Meeting of Stockholders are incorporated by reference in Part III hereof. PART I ITEM 1. BUSINESS THE COMPANY ORGANIZATION AND GENERAL DEVELOPMENT Policy Management Systems Corporation (the "Company"), a leading provider of application software, related automation support and outsourcing services designed to meet the needs of the global insurance and financial services industries, is a South Carolina corporation incorporated in 1980. From 1974 until 1980, the Company operated as a division of Seibels, Bruce & Company. Prior to 1985, the Company operated primarily as a provider of insurance software systems and related automation support services to the property and casualty insurance market in the United States and Canada. Since that time, the Company has expanded geographically into Europe, Asia and Australia, as well as into the life and health insurance markets, the information services market and the financial services market. However, as a result of certain changes in the health insurance market, in 1995 the Company ceased doing business in this market and focused principally on the needs of property and casualty and life insurers and financial services providers. Through internal development and acquisitions, the Company has expanded its software product and services offerings to include client/server computing, strategic alliances, and outsourcing, thereby strengthening the Company's ability to serve the global insurance marketplace. GEOGRAPHIC EXPANSION The Company determined that developing international customers and marketplaces was essential to becoming a leading provider of insurance automation solutions and systems and related professional services to the global insurance industry. The Company opened its Canadian office in 1977 and, since that time, has expanded operations to include Europe, Asia and Australia. The Company currently has customers in 30 different countries (see Segment Information). Beginning in 1993, the Company significantly increased its presence in European markets through certain strategic acquisitions (see Acquisitions). In December 1993, the Company acquired Norwegian-based Vital Data A.S. ("Vital Data"), which provided the Company with an outsourcing and development center for the Company's Nordic life systems. In December 1994, the Company acquired London, England-based Creative Holdings Group, Limited ("Creative"), to strengthen the Company's position in the European, Australian and Asian markets by providing the Company with a customer base of medium-sized general insurance companies, as well as proven products for these markets. Additionally, in October 1995, the Company purchased micado Beteiligungs-und Verwaltungs GmbH ("micado"), a provider of software and services to German insurance and financial services companies, further strengthening the Company's European presence as well as providing the Company with expertise in object-oriented technology. ACQUISITIONS During 1985, the Company initiated an expansion into the property and casualty information services business to provide information to assist insurers in risk selection, pricing and claims adjusting. By 1988, through acquisitions of regional providers of these services, the Company had developed a nationwide network to provide a full range of information services. These services were further expanded from 1990 through 1994, with the acquisition of companies that provide information services primarily related to the life and health insurance industries. During 1997, the Company sold its property and casualty information services business. Between 1986 and 1989, the Company, through business acquisitions, took the initial steps towards becoming a major supplier of automated solutions to the life insurance industry. Since then, the Company has continued to expand its product 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. In 1993, the Company acquired Vital Data to expand the Company's international growth into the Scandinavian countries of Norway, Finland, Sweden, and Denmark. In 1994, the Company, through its subsidiary PMS Norden, began developing systems for the Nordic market for individual life, group life and pensions. To further strengthen its position in Europe and other foreign markets, the Company acquired Creative in December 1994 and micado in October 1995. Creative provides services and products to medium-sized general insurance companies. The acquisition of Creative positioned the Company to capitalize on business opportunities throughout Europe, Asia, and Australia. Headquartered in Germany, micado provides services and software to German insurance and financial services companies. The acquisition of micado, in addition to expanding the Company's customer base, positions the Company to make significant advances in the use of object-oriented technology which has been utilized in S3+TM, the Company's client/server solution for the property and casualty insurance industry (see Client/Server Technology). In October 1996, the Company acquired certain assets of Co-Cam Pty Ltd., headquartered in Melbourne, Australia, as a means to further strengthen its presence in the Asian and Australian marketplaces. CLIENT/SERVER TECHNOLOGY Prior to 1989, the Company offered insurance software systems to the property and casualty insurance industry designed to run on traditional mainframe, midrange and personal computers. In 1987, the Company began research on an integrated relational database client/server solution for the insurance industry known as Series III . Using relational databases and cooperative processing between hardware platforms and allowing access to data from multiple sources through advanced networks, Series III provides a flow of information between insurance agents, branch offices and the home office of insurance companies. Series III, with the release of workers' compensation functionality in 1997, provides a comprehensive solution for all facets of the property and casualty insurance industry worldwide The completion of Release 9.1 of Series III marked the first release of Series III functionality utilizing the Microsoft Windows NT operating system and resulted in Series III being renamed S3+ (All subsequent references to Series III will be S3+). S3+ is currently able to process business for personal lines (primarily auto and homeowners' policies) for the property and casualty insurance industry in a Windows NT environment. The continued development of S3+ will incorporate the Windows NT operating system capability for billing and collections, commercial lines, and workers' compensation insurance. The Company also continues to provide solutions to the property and casualty insurance industry through its Series II products, an earlier generation of solutions, which are traditional mainframe computer products. From its inception, S3+ was designed for year 2000 processing and Series II products have been enhanced with the capability of handling transactions with dates of the year 2000 and beyond. The POINT System, the Company's midrange solution for the United States and Latin American property and casualty insurance markets, has been re-engineered to utilize client/server capabilities featuring a graphical user interface client. The re-engineered POINT System, renamed Point+ utilizes object-oriented technology and will be offered on multiple platforms and is designed to process data in the year 2000 and beyond. INSURE/90 , an IBM AS/400 based product, acquired during the acquisition of Creative, became part of the Company's general insurance software solution to the European, Asian and Australian markets. Currently under development is I+ , the next generation of applications to ultimately replace the INSURE/90 product, which will increase functionality and offer client/server capabilities and object-oriented technology. INSURE/90 has been updated with the capability of processing transactions for the year 2000 and beyond. The Company's acquisition of CYBERTEK in August 1993 provided the Company with the CK/4 Enterprise Solution, an integrated solution for the life insurance industry. In March 1995, the Company made generally available the first release of CyberLife , an integration of CYBERTEK functionality with client/server technology. The Company's subsequent releases of CyberLife's scalable platforms include those capable of processing on PC local area networks or on IBM mainframe hardware, and client processes executing in a Windows environment. CyberLife is also capable of processing transactions for the year 2000 and beyond. STRATEGIC ALLIANCES To expand its software product and services offerings, the Company has formed certain strategic alliances. For example, the Company's initial efforts on S3+ development were enhanced by a Development and Marketing Agreement between the Company and International Business Machines Corporation ("IBM"). The Company has also entered into Value-Added Reseller and Industry Remarketer agreements with IBM for the AS/400 and S/390 computer systems. The Company also supports an open systems strategy, which allows the host-based components of S3+ to be portable across other technology platforms. As part of the open systems initiative, the Company joined Oracle's Business Alliance Program, Sybase's Open Solutions Partners Program and Microsoft's Solution Developer Program. As Value-Added Resellers for both Oracle and Sybase, the Company positioned itself for developing its solutions to the insurance industry based on customer demand. INFORMATION TECHNOLOGY OUTSOURCING AND BUSINESS PROCESS OUTSOURCING The Company provides outsourcing services to the insurance industry using its data centers, technical personnel, business analysts, and insurance specialists resources. The Company's data centers are located in North America, Europe, and Australia. As an extension of traditional Information Technology Outsourcing ("ITO"), the Company offers Business Process Outsourcing ("BPO") to the property and casualty and life insurance industries. BPO is the third party management, operation, and/or ownership of a customer's insurance related internal business processes. It transcends systems outsourcing and management by offering much more than data center operations, network management, and application support. By combining advanced technologies with re-engineered workflows, the Company is able to bring an increased level of efficiency to its customers' business processes. Entrusting these processes to the Company allows customers to take advantage of these efficiencies and focus resources on core competencies. BUSINESS STRATEGY The Company's business strategy is to offer value to customers by structuring long-term relationships and agreements that provide its customers with continuously updated solutions, while providing a high degree of recurring revenues to the Company. During the early stages of the Company's development, a major portion of its revenues was derived from systems licensing activities. The Company has continued to expand as a provider of a full range of business solutions to the global insurance and financial services industries and now the majority of the Company's revenues are derived from outsourcing, professional services and information services activities. SEGMENT INFORMATION The Company has classified its operations into five operating segments and revised its segment information accordingly. The operating segments are the five revenue-producing components of the Company for which separate financial information is produced for internal decision making and planning purposes. The segments are as follows: 1. Property and casualty enterprise software and services (generally referred to as the "domestic property and casualty business"). This segment provides software products, product support, professional services and outsourcing primarily to the US property and casualty insurance market. 2. Life and financial solutions enterprise software and services (generally referred to as the "domestic life and financial solutions business"). This segment provides software products, product support, professional services and outsourcing primarily to the US life insurance and financial services markets. In 1995, this segment included the Company's health services unit which was sold in June 1995. 3. International. This segment provides software products, product support, professional services, outsourcing and information services to the property and casualty and life insurance markets primarily in Canada, Europe, Asia and Australia. 4. Property and casualty information services. This segment provided information services, principally motor vehicle records and claims histories, to US property and casualty insurers. This segment was sold in August 1997. 5. Life information services. This segment provides information services, principally physician reports and medical histories, to US life insurers. In accordance with the provisions of Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company has adjusted all prior period financial information to reflect these revised classifications. The majority of the Company's revenues are generated from products and services provided in the United States, although the Company does have customers in a total of 30 foreign countries. The following table illustrates the relative percentages of total revenue represented by the Company's products and services by geographic region.
Percent of Revenue Year Ended December 31, 1997 1996 1995 ----- ----- ----- United States. . . . 74.4% 76.0% 78.1% Canada . . . . . . . 1.9% 2.9% 3.0% Europe . . . . . . . 17.0% 15.3% 13.3% Asia and Australia . 6.7% 5.8% 5.6%
Additional information regarding operating segments is contained in Note 12 of Notes to Consolidated Financial Statements. SOFTWARE PRODUCTS The Company offers over 100 business solutions, which include more than 70 application software systems, designed to meet the needs of the property and casualty and life insurance and financial services markets. The Company's primary software systems currently run on midrange and mainframe hardware with both personal computers and terminals as user interfaces. The Company also supports an open systems strategy, which provides for the host-based software components to be converted to certain open platforms, allowing customers the capability of adding cost-effective increments of processing power. Significant efforts are underway to incorporate object-oriented and Internet-enabled technology (see Product Development). The Company's software products automate most insurance processing functions, including various underwriting, claims, accounting, financial reporting, regulatory reporting and cash management functions. The systems have been designed to permit ease of use, providing flexibility in adapting to a customer's specific requirements. The systems are designed to be modular in structure and to facilitate the application of updates and enhancements, as well as the interfacing and integration with different systems. Most of the Company's applications will operate on either a stand-alone basis or in conjunction with other applications in the same product group. Client/server technologies serve as a platform for the Company's current system offerings for the property and casualty and life insurance markets. A primary advantage of the Company's software products is the full integration of the information and data gathering, processing, underwriting, claims handling and reporting processes for providers of insurance, creating a cooperative processing environment. In this cooperative processing environment, insurance professionals, using personal computer workstations, are capable of processing multiple tasks concurrently with minimal clerical support and data entry. The Company's software products utilize technologies such as relational databases, graphical user interfaces, object-oriented programming and imaging. The Company's objective is to provide software systems which allow system upgrades, additions and interfaces to be implemented quickly, with minimal disruption to ongoing operations. The Company obtains licenses from third parties for a wide range of software products and services which are used in varying degrees to develop and enhance the Company's products and in performing services for its customers. Such products range from mainframe operating systems to graphical user interfaces. Although such products licensed from third parties are important to the products and services offered by the Company, there is no single product licensed from a third party that, if discontinued, would significantly impact the Company's development of its products or performance of its services. PRODUCT SUPPORT AND SERVICES PRODUCT SUPPORT Most customers initially licensing the Company's software systems pay a monthly license fee which entitles the customer to Maintenance, Enhancements and Services Availability ("MESA"). Under the maintenance provisions of MESA, the Company provides telephone support and error correction to current base versions of licensed systems. The enhancement provisions of MESA provide any additions or modifications to the licensed systems, if and when they become generally available as a result of the Company's continuing research and development efforts. Services availability allows customers access to professional services, other than maintenance and enhancements, which are provided under separate arrangements during the MESA term. PROFESSIONAL SERVICES The Company provides professional consulting and other services on a time and material basis and in some circumstances under fixed-price arrangements, including needs analysis, consulting, implementation, project management and programming. In addition, the Company provides a full range of training programs to allow customers to gain an understanding of the utilization and functionality of its products and technology. ITO AND BPO SERVICES The Company offers outsourcing services from its data centers located in North America, Europe and Australia. These services range from providing processing capabilities for highly regulated lines of business such as the Florida Joint Underwriters' Association, Massachusetts automobile and other 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. ITO services are typically provided under contracts having terms from three to ten years. The Company also offers related BPO services within the property and casualty and life insurance industries. INFORMATION SERVICES The Company offers information services designed to facilitate efficient review of underwriting risks which may be ordered and received on an automated basis through the Company's nationwide telecommunications network. These information services, which assist insurance professionals in making more informed decisions about risk selection, pricing and claims settlement, currently include physician reports and medical histories provided through the Company's database services. PRODUCT DEVELOPMENT Historically, the computer software and services industry has experienced rapid technological changes in hardware and software. Additionally, the insurance industry is constantly subject to regulatory changes and new requirements. This combination of changes requires the Company to develop new products and enhance its existing products to constantly meet the automation needs of the global insurance and financial services industries. Examples of the Company's continuing product development efforts are the Company's S3+ solution for property and casualty and the CyberLife solution for the life and financial services industries (see Software Products above). Although development efforts for the full release of S3+ for the property and casualty insurance industry will continue, the majority of the components of S3+ have been delivered since research began in 1987. With the completion of Release 8.0a in 1997, S3+ offers a comprehensive solution to the property and casualty industry worldwide in an IBM OS/2 operating system environment. The Company has adopted object-oriented technology for current and future application development. As such, it is the Company's goal that every new development project uses the same technology and same architecture to create new insurance objects. S3+ incorporates object-oriented technology and also supports the Microsoft Windows NT operating system. Development continues to convert the functionality of the OS/2 product to compatibility with the Windows NT operating system. This effort is focused on providing billing and collections, commercial lines and workers compensation in a Windows NT environment. The development of CyberLife has represented a significant investment for the Company. Beginning with the existing functionality of the CK/4 Enterprise Solution, this development has involved creating a new architecture and expanding those capabilities employing object-oriented development techniques and other leading-edge technologies to create a client/server enterprise-wide system for the life insurance and financial services industries. CyberLife's underlying technologies include expert systems, relational databases, real-time processing, and multi-platform implementations. The system is designed to be scalable from IBM mainframes to LAN server platforms. The client desktop functions with the Windows operating systems. As part of this development effort and consistent with the Company's desire to reuse its software assets, a number of the Company's other products, including the Client Information System, DecisionWise system and the ViLink Electronic Commerce Platform , are being integrated with CyberLife. This will eliminate the need to develop similar functionality for CyberLife. While the Company intends to continue to develop applications for IBM architecture platforms, it also supports open systems. This open systems approach, which allows the host-based components to be converted to various platforms, will allow separate software products to be integrated with one another, as well as with the customer's existing and future systems, whether provided by the Company or other vendors. The Company has completed the re-engineering of its POINT system, a midrange solution designed for use by mid-sized property and casualty insurance companies, to make it portable across different hardware platforms. The Point+ system, with this open systems direction, will offer insurance companies increased flexibility in adding functionality and processing power. In an effort to maintain and strengthen its competitive position, the Company invests substantial amounts in internal product development. Expenditures for internal product development, which were capitalized, were $62.5, $56.8 and $46.8 million in 1997, 1996 and 1995, representing 10.7%, 11.6% and 11.2% of total revenues, respectively. In addition to its continuing development efforts, the Company, in the past several years, has 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 intends to continue to expand its product and services offerings through internal development and acquisitions. MARKETING AND CUSTOMERS The Company primarily markets its products and services to several thousand property and casualty and life insurance companies, independent insurance agents and adjusters and financial institutions. In addition, the Company offers its software products and automation and administration support services in 30 foreign countries. At December 31, 1997, the Company was providing its products and services to more than 7,600 insurance companies, agents and adjusters. No single customer accounted for more than 10% of revenues during the year ended December 31, 1997. The Company markets its products and services through a staff of approximately 170 employees, including sales and marketing support personnel, most of whom are specialists in the insurance industry and information technology. The Company's marketing force works extensively with each prospective customer to assist in analyzing its specific requirements. Consequently, the marketing process may extend over several months for a prospective customer seeking a major automation based solution. In addition to its own software products, the Company markets certain third party software products to its customers. Typically, these products primarily are designed to perform noninsurance functions or to improve the control and productivity of computer resources. LICENSES AND PRODUCT PROTECTION The Company's revenues are generated principally by licensing to customers standardized insurance software systems and providing outsourcing, professional services and information services to the global insurance and financial services industries. 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, which covers the right to use during the term of the agreement, also provides access to MESA (see description above under Product Support and Services). Customers wishing to acquire perpetual rights to use the Company's software enter into additional agreements to acquire such rights. The Company relies upon contract, copyright and other bodies of law to protect its products as trade secrets and confidential proprietary information. The Company's agreements with its customers and prospective customers prohibit disclosure of the Company's trade secrets and proprietary information to third parties without the consent of the Company and generally restrict the use of the Company's products to only the customers' operations. The Company also informs its employees of the proprietary nature of its products and obtains from them an agreement not to disclose trade secrets and proprietary information. Notwithstanding those restrictions, it may be possible for competitors of the Company to obtain unauthorized access to the Company's trade secrets and proprietary information. The Company owns numerous trademarks and service marks which are used in connection with its business in all segments. These trademarks are important to its business. Depending upon the jurisdiction, the Company's trademarks are valid as long as they are in use and/or their registrations are properly maintained and they have not been found to have become generic. Registrations of these trademarks can generally be renewed indefinitely as long as the trademarks are in use. COMPETITION The computer software and services industry is highly competitive. Based upon its knowledge of the industry, the Company believes it is a leading provider of application software, related automation support and outsourcing services designed to meet the needs of the global insurance and financial services industries. Very large insurers, which internally develop systems similar to those of the Company, may or may not become major customers of the Company for software. There are also a number of independent companies which offer software systems that perform certain, but not all, of the functions performed by the Company's systems. There are a number of larger companies, including computer services, software and outsourcing companies, consulting firms, computer manufacturers, and insurance companies, that have greater financial resources than the Company and possess the technological ability to develop software products similar to those offered by the Company. There are also several companies that provide information services similar to those provided by the Company to the insurance industry. These companies present a significant competitive challenge to the Company's information services business. The Company competes on the basis of its service, system functionality, performance, technological advances and price. SEASONALITY For discussion of seasonality, see Seasonality and Inflation in Management's Discussion and Analysis of Financial Condition and Results of Operations. EMPLOYEES At December 31, 1997, the Company had 5,794 full-time employees and 6,017 total employees located in offices worldwide. ITEM 2. PROPERTIES The Company owns its 700,000 square foot headquarters complex located on 145 acres in Blythewood, South Carolina. The Company leases space at 23 various locations for its regional and branch offices throughout the United States. Internationally, the Company leases space at 23 locations throughout Canada, Central and South America, Europe, Africa, Asia, Australia and New Zealand. The Company, through its data centers located in Blythewood, South Carolina, Oslo, Norway and North Ryde, Australia, utilizes 21 mid-range and mainframe computers. All computers are owned or held under short-term leases. In total, these computers have over 16,000 megabytes of memory and are capable of processing almost 1,400 million instructions per second. The Company is currently utilizing 75% to 85% of this capacity. ITEM 3. LEGAL PROCEEDINGS In March 1994, Security Life of Denver Insurance Company ("SLD") brought suit against the Company in the United States District Court for the District of Colorado alleging breach of a life insurance joint development contract, unfair trade practices, and fraud. SLD sought direct, indirect, consequential, and punitive damages in excess of $80 million. In February 1997, following a jury trial, the Court and jury entered judgment in favor of the Company against SLD on the claims of fraud and unfair trade practices. A verdict and judgment was returned against the Company for breach of contract and damages of $3.5 million, together with pre-judgment interest. In addition, the jury found that SLD was using the Company's trade secrets without permission. As a result of post trial motions, the judgment was amended to delete the award of pre-judgment interest and SLD was ordered to return the Company's systems. Both the Company and SLD have appealed to the United States Court of Appeals. Changes in the status of this proceeding could result in a change in the Company's estimate of anticipated liability for the costs associated with these matters. The Company is also presently involved in litigation which commenced in January of 1996 in the Circuit Court in Greenville County, South Carolina, with Liberty Life Insurance Company and certain of its affiliates ("Liberty") arising out of the parties' prior contractual relationship related to the development and licensing of Series III life insurance systems and the subsequent licensing of the Company's CYBERTEK life insurance systems. Liberty's complaint alleges breach of contract, breach of express and implied warranties, fraudulent inducement, breach of contract accompanied by a fraudulent act, and recission. Liberty has alleged actual and consequential damages in excess of $160 million and also seeks treble and punitive damages. The Company has asserted various affirmative defenses and is pursuing counterclaims against Liberty for breach of contract, recoupment, breach of good faith and fair dealing, and breach of contract accompanied by a fraudulent act. The Company is seeking equitable relief, including injunctive relief, and currently unspecified actual, compensatory and consequential damages. Based upon the allegations raised in a prior lawsuit and the SLD lawsuit, the Company's insurer, St. Paul Mercury Insurance Company ("St. Paul"), commenced in June 1995 a declaratory judgment action in the United States District Court for the District of South Carolina against the Company to determine St. Paul's obligation for defense costs and to indemnify the Company for any payment related to these claims. The Company filed a counterclaim against St. Paul seeking to recover the Company's defense costs in both matters, coverage for damages, if any, awarded in those matters, and consequential and punitive damages. In connection with the dismissal of the prior lawsuit, St. Paul and the Company agreed to dismiss with prejudice all claims against each other with respect to the matter, and St. Paul agreed to reimburse the Company for the Company's legal fees. The action continues as to the parties' claims related to insurance coverage for the SLD matter. In addition to the litigation described above, there are also various other litigation proceedings and claims arising in the ordinary course of business. The Company believes it has meritorious defenses and is vigorously defending these matters. While the resolution of any of the above matters could have a material adverse effect on the results of operations in future periods, the Company does not expect these matters to have a material adverse effect on its consolidated financial position. The Company, however, is unable to predict the ultimate outcome or the potential financial impact of these matters. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.
EXECUTIVE OFFICERS OF THE REGISTRANT Name Age Position - ---- --- -------- G. Larry Wilson . . . 51 Chairman of the Board, President and Chief Executive Officer David T. Bailey . . . 51 Executive Vice President Paul R. Butare. . . . 46 Executive Vice President Donald A. Coggiola. . 58 Executive Vice President Stephen G. Morrison . 48 Executive Vice President, Secretary, General Counsel and Chief Administrative Officer Timothy V. Williams . 48 Executive Vice President and Chief Financial Officer 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 1998. 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. Paul R. Butare - Executive Vice President of the Company since October 1995. Responsible for the Life Insurance Group. In previous capacities with the Company, Mr. Butare has had management responsibilities for Life sales and marketing, Life product development, Property and Casualty marketing support and Property and Casualty systems and product development. Employed by the Company since 1981. Donald A. Coggiola - Executive Vice President of the Company since 1986. Responsible for the Sales and Marketing Group. Employed by the Company since 1979. Retired effective January 1, 1998. Stephen G. Morrison - Executive Vice President, Secretary and General Counsel of the Company since January 1994 and Chief Administrative Officer since 1997. Responsible for the administration of the legal affairs of the Company, the Legal Services Group, Human Resources division and Corporate Marketing division. 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. Mr. Morrison will continue his affiliation with Nelson, Mullins, Riley & Scarborough and continues to perform certain services in that capacity on a declining basis. Timothy V. Williams - Executive Vice President and Chief Financial Officer of the Company since February 1994. Responsible for the Financial and Operational Services Group. Employed by the Company since February 1994. Prior to joining the Company, 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.
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.
1997 High Low ------- ------ First Quarter... $ 46 5/8 $ 42 Second Quarter.. 54 41 1/2 Third Quarter... 64 15/16 48 Fourth Quarter.. 69 7/8 58 1/8
1996 High Low ------- ------ First Quarter... $53 3/4 $ 43 5/8 Second Quarter.. 55 1/2 43 7/8 Third Quarter... 50 1/2 33 1/8 Fourth Quarter.. 47 3/8 34 1/8
Title of Class Common Stock, $.01 par value The number of record holders of the Company's common stock was 1,263 as of March 17, 1998. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
RESULTS OF OPERATIONS 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------- (In Thousands, Except Per Share Data) Revenues. . . . . . . . . . . . . . . . . $582,782 $488,230 $425,613 $357,587 $316,805 Operating income (loss) . . . . . . . . . 82,151 73,157 19,554 6,682 (75,747) Other income and (expenses), net. . . . . (3,583) (2,677) (543) 1,256 10,656 Income from continuing operations before income taxes (benefit) . . . . . 79,757 70,480 19,011 7,938 (65,091) Discontinued operations, net. . . . . . . 333 979 (6,814) (16,286) (796) Net income (loss) . . . . . . . . . . . . $ 50,257 $ 45,997 $ 3,139 $ (9,658) $(56,134) Basic earnings (loss) per share . . . . . $ 2.76 $ 2.47 $ 0.16 $ (0.46) $ (2.46) Diluted earnings (loss) per share . . . . $ 2.67 $ 2.44 $ 0.16 $ (0.46) $ (2.44) ========= ========= ========= ========= ========= FINANCIAL CONDITION Cash and equivalents, marketable securities and investments. . . . . . . $ 46,525 $ 30,838 $ 44,614 $ 34,304 $156,772 Current assets. . . . . . . . . . . . . . 185,809 160,342 165,593 167,725 287,737 Current liabilities . . . . . . . . . . . 86,213 112,636 94,461 76,856 80,981 Working capital . . . . . . . . . . . . . 99,596 47,706 71,132 90,869 206,756 Total assets. . . . . . . . . . . . . . . 618,406 581,386 532,736 524,031 659,803 Long-term debt (excludes current portion) 37,714 34,268 14,873 4,162 5,655 Total liabilities . . . . . . . . . . . . 207,910 218,134 150,064 147,109 182,831 Stockholders' equity. . . . . . . . . . . 410,496 363,252 382,672 376,922 476,972 The above should be read in conjunction with the Consolidated Financial Statements, Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in this Annual Report. Prior year data has been reclassified to conform to current year presentation. The results of operations in 1996, 1995, 1994 and 1993 reflect special charges. The results of operations in 1996 reflect a net special credit of $3.4 million. This credit is a result of a pre-tax gain of $9.4 million related to the recovery of previously incurred litigation costs and a pre-tax charge of $6.0 million related to other litigation. The results of operations in 1995 reflect special charges of $56.4 million (after taxes $39.9 million, or $2.06 per share). These charges are principally related to the restructure of the Company's data processing facilities and information services business, litigation costs, acquisition-related charges, impairment of certain intangible assets and software associated with acquired businesses and the gain on the sale of the Company's health services business. The results of operations in 1994 reflect special charges of $67.5 million (after taxes $41.5 million or $1.99 per share). These charges are principally related to the impairment of intangible assets associated with acquired businesses and discontinued acquired software products and changes in estimates associated with previously established restructuring reserves. The results of operations in 1993 reflect special charges of $98.8 million (after taxes $76.2 million or $3.29 per share). These charges are principally related to the impairment of certain intangible assets associated with employee severance and outplacement and the future abandonment of certain leased office facilities as well as certain other one-time charges. See also Quarterly Consolidated Results of Operations and Note 11 of Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Set forth below are certain operating items expressed as a percentage of revenues and the percent increase (decrease) for those items between the periods presented:
Percent Increase (Decrease) Percentage of Revenues 1997 1996 Year Ended December 31, vs vs 1997 1996 1995 1996 1995 - ---------------------------------------------------------------------------------------------- REVENUES: Licensing . . . . . . . . . . . . . . . . . . . . 22.8% 22.3% 24.0% 21.9% 6.7% Services. . . . . . . . . . . . . . . . . . . . . 77.2 77.7 76.0 18.6 17.2 ------ ------ ------ 100.0 100.0 100.0 19.4 14.7 OPERATING EXPENSES: Cost of revenues Employee compensation and benefits . . . . . . . 39.9 37.0 33.0 28.6 28.9 Computer and communications expenses . . . . . . 6.0 6.5 6.5 9.2 16.1 Information services and data acquisition costs. 5.4 5.9 6.8 9.6 (0.5) Depreciation and amortization of property, equipment and capitalized software costs . . 10.0 9.9 11.6 20.1 (1.4) Other costs and expenses . . . . . . . . . . . . 6.8 8.8 7.7 (7.5) 30.8 Selling, general and administrative expenses. . . . 16.0 15.5 15.4 23.5 15.2 Amortization of goodwill and other intangibles. . . 1.8 2.1 2.2 2.1 12.0 Litigation settlement and expenses, net . . . . . . - (0.7) 4.3 (100.0) (118.5) Gain on sale of Health business and related assets. - - (1.9) - (100.0) Business acquisition charges. . . . . . . . . . . . - - 0.6 - (100.0) Purchased research and development. . . . . . . . . - - 3.4 - (100.0) Loss on disposition of computer equipment . . . . . - - 4.3 - (100.0) Impairment and restructuring credits (charges), net - - 1.6 - (103.6) ------ ------ ------ 85.9 85.0 95.5 20.6 2.2 OPERATING INCOME. . . . . . . . . . . . . . . . . . 14.1 15.0 4.5 12.3 274.1 Equity in earnings of unconsolidated affiliates . . 0.2 - - - - OTHER INCOME AND EXPENSES, NET. . . . . . . . . . . (0.6) (0.6) (0.1) 33.8 393.0 ------ ------ ------ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES . . . . . . . . . . . . . . . 13.7 14.4 4.4 13.2 270.7 Income taxes. . . . . . . . . . . . . . . . . . . . 5.1 5.2 2.1 17.2 181.1 ------ ------ ------ INCOME FROM CONTINUING OPERATIONS . . . . . . . . . 8.6 9.2 2.3 10.9 352.3 Discontinued operations, net. . . . . . . . . . . . - 0.2 (1.6) (66.0) (114.4) ------ ------ ------ NET INCOME. . . . . . . . . . . . . . . . . . . . . 8.6% 9.4% 0.7% 9.3% 1,365.3% ====== ====== ======
The Company's revenues are generated principally by licensing to customers standardized insurance software systems and providing automation and administrative support and information services to the global insurance and financial services industries. Licensing revenues are provided for under the terms of 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. Services revenues are derived from professional support services, which include implementation and integration assistance, consulting and education services, information and outsourcing services. REVENUES
Licensing 1997 Change 1996 Change 1995 - -------------------------------------------------------------- (Dollars in Millions) Initial charges. . . . $ 69.9 34.7% $ 51.9 6.0% $ 48.8 Monthly charges. . . . 62.9 10.3 57.0 7.1 53.3 ------- ------- ------- $132.8 21.9% $108.9 6.7% $102.1 ======= ======= ======= Percentage of revenues 22.8% 22.3% 24.0% - ---------------------- ------- ------- -------
Initial license revenues for 1997 increased $18.0 million compared to 1996 with the following increases by business segment: domestic property and casualty up 18.0% ($3.7 million); domestic life insurance and financial solutions up 34.2% ($5.0 million); and international up 55.1% ($9.3 million). Initial license revenues for 1996 increased $3.1 million compared to 1995 due principally to an increase in domestic life and financial solutions initial licensing activity of $5.9 million (includes a decrease in divested health services of $0.4 million). This increase was offset by a decrease of $2.7 million in domestic property and casualty initial licensing. However, initial license charges for 1995 included a $4.0 million non-recurring source code license agreement with a cross-industry vendor and $4.8 million related to joint marketing and distribution arrangements with NCR Corporation. These revenues were replaced, in part, by a large license of the Company's Series II and S3+ products executed during the fourth quarter of 1996 for $6.2 million. (All references to Series III have been changed to S3+) Initial license charges include right-to-use licenses of $8.2, $4.6, and $5.6 million for 1997, 1996 and 1995, respectively. The right-to-use licenses represent acquisitions by certain customers of perpetual rights in conjunction with renewals of MESA by these customers, or in conjunction with the initial license of a product. Initial license charges also include termination charges (related to the buyout of monthly license charges) of $0.4, $1.7 and $3.5 million for 1997, 1996 and 1995, respectively. Because a significant portion of initial licensing revenues are recorded at the time new systems are licensed, there can be significant fluctuations in revenue from period to period. Set forth below is a comparison of domestic and international initial license revenues for 1997, 1996 and 1995:
Initial licensing 1997 1996 1995 - --------------------------------------------------------------- (Dollars in Millions) Property and casualty (domestic). . . . $23.8 $20.1 $22.8 Life and financial solutions (domestic) 19.9 14.9 9.0 International . . . . . . . . . . . . . 26.2 16.9 17.0 ------ ------ ------ $69.9 $51.9 $48.8 ====== ====== ====== Percentage of total revenues. . . . . . 12.0% 10.6% 11.5% - --------------------------------------- ------ ------ ------
Monthly license charges for 1997 increased $5.9 million compared to 1996 with the following increases by business segment: domestic life insurance and financial solutions up 42.4% ($3.8 million); and international up 18.3% ($2.1 million). These increases are related to increased licensing activity. Domestic property and casualty monthly license charges remained relatively unchanged. Monthly license charges for 1996 increased $3.7 million compared to 1995. This increase is principally related to an increase of $3.0 million in licensing activity in the international segment due to the acquisitions of Co-Cam in August 1996 and micado in October 1995. Domestic life and financial solutions monthly license charges increased $1.2 million (includes a decrease in divested health services of $0.5 million). Licensing revenues in the United States are being impacted by various market factors. Many insurance companies are spending significant amounts of money to solve their year 2000 problems. To date, the Company does not believe it has experienced a significant impact, positively or negatively, from year 2000 issues (see Year 2000 Readiness for further discussion of the year 2000 issue).
Services 1997 Change 1996 Change 1995 - --------------------------------------------------------------------- (Dollars in Millions) Professional and outsourcing $380.6 23.1% $309.2 18.9% $260.0 Information. . . . . . . . . 64.6 (0.5) 64.9 8.0 60.1 Other. . . . . . . . . . . . 4.8 (5.9) 5.2 54.9 3.4 ------- ------- ------- $450.0 18.6% $379.3 17.2% $323.5 ======= ======= ======= Percentage of total revenues 77.2% 77.7% 76.0% - ---------------------------- ------- ------- -------
Professional and outsourcing services revenues for 1997 increased $71.4 million compared to 1996, with the following increases by business segment: domestic property and casualty up 19.6% ($30.6 million); domestic life insurance and financial solutions up 61.4% ($26.6 million); and international up 12.9% ($14.2 million). The increases are principally due to increases in implementation services and in the processing volumes of services provided to new and existing customers. The increases were partially offset by the elimination of approximately $11.4 million in revenue that generated no profit related to the Florida Business Process Outsourcing ("BPO") unit. Professional and outsourcing services revenues for 1996 increased $49.2 million compared to 1995. This increase was principally related to services from both new and existing contracts amounting to $24.1 million for domestic property and casualty, $5.9 million for domestic life and financial solutions (includes a decrease in divested health services of $7.1 million) and $19.2 million for international. The increase in the international results was principally due to the acquisition of Co-Cam in August 1996, and micado in October 1995, and new services contracts in Europe. The Company believes that the operational and financial characteristics of its information services businesses differs substantially from its other business. During 1997, the Company disposed of its remaining property and casualty information services business (see Discontinued Operations). The Company is continuing to evaluate its life information services business. OPERATING EXPENSES COST OF REVENUES Employee compensation and benefits for 1997 increased 28.6% compared to 1996 principally as a result of the increased salaries and related costs associated with the growth in staffing in all business units. For this period, compensation and benefits increased 31.2% ($14.9 million) internationally, while domestic increased 27.6% ($36.8 million). Employee compensation and benefits for 1996 increased 28.9% compared to 1995, and principally resulted from increased salaries and related costs associated with the acquisition of Co-Cam in August 1996, micado in October 1995 and increased costs associated with the growth in staffing for additional professional and outsourcing services to new and existing customers. For this period, compensation and benefits increased 68.5% ($19.2 million) internationally, while domestic increased 19.0% ($21.3 million). Computer and communications expenses for 1997 increased 9.2% compared to 1996, principally as a result of increased communications, data circuit and maintenance costs associated with the growth of the Company's domestic and international outsourcing operations. Computer and communications expenses for 1996 increased 16.1% compared to 1995, principally due to the effect of licensing expense related to the Company's long-term license and maintenance agreement (entered into in March 1995) to acquire rights to certain operating systems management software products for use in the Company's worldwide data center operations, and the effect of lease expense associated with leases entered into as part of the Company's restructuring of its data processing facilities. Information services and data acquisition costs for 1997 increased 9.6% compared to 1996, principally due to an increase in the volume of expenses for attending physician statements related to the provision of life insurance information services. Information services and data acquisition costs for 1996 remained relatively unchanged compared to 1995. Depreciation and amortization of property, equipment and capitalized software costs for 1997 increased 20.1% compared to 1996. This increase is due principally to higher amortization expense resulting from the release of the latest version of CyberLife client/server life insurance software in October 1997. In addition, depreciation expense increased due to the Company's increased investment in network and PC hardware. Although depreciation and amortization of property, equipment and capitalized software costs for 1996 decreased slightly compared to 1995, amortization of internally developed software costs increased $3.7 million (18.8%), principally due to amortization associated with the release of the latest version of CyberLife client/server life insurance software in November 1996 and the release of the Company's property and casualty insurance S3+ client/server software systems in October 1996. Depreciation expense decreased by $4.7 million as a result of the 1995 restructuring of the Company's US data center and subsequent lease of computer equipment. Other operating costs and expenses for 1997 decreased 7.5% compared to 1996. This decrease is primarily due to the elimination of costs (and previously referenced revenues) for the BPO unit in Florida and an increase in amounts capitalized principally related to the continued enhancement and development of the Company's S3+ property and casualty insurance software, CyberLife life insurance software and I+ international property and casualty software. The decrease was partially offset by increased fees for the use of consultants and independent contractors to satisfy staffing needs for certain development and services activities, as well as increased rent and other facility costs. Other costs and expenses for 1996 increased 30.8% compared to 1995. Fees related to the use of consultants and independent contractors increased, principally the result of training costs in new technologies and the satisfaction of staffing needs for certain development and services activities. These increases were offset by an increase in amounts capitalized principally related to the increased use of outside resources in the continued enhancement and development of the Company's S3+ property and casualty insurance software and CyberLife life insurance software as well as other ongoing development projects, and decreased costs associated with the reduction of certain assigned risk pools serviced by the Company's BPO business. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses for 1997 increased 23.5% compared to 1996, principally from the Company's investment in its international sales force and administrative infrastructure. Selling, general and administrative expenses for 1996 increased 15.2% compared to 1995, almost entirely due to the Company's investment in its international sales force and administrative infrastructure. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES Amortization of goodwill and other intangibles for 1997 remained relatively unchanged compared to 1996. Amortization of goodwill and other intangibles for 1996 increased 12.0% compared to 1995, principally due to the result of amortization of intangible assets related to the October 1995 acquisition of micado. LITIGATION SETTLEMENT AND EXPENSES, NET In May 1996, the Company resolved its litigation with the California State Automobile Association Inter-Insurance Bureau and the California State Automobile Association ("CSAA"), concluding with an agreement for the mutual dismissal of all related claims and counterclaims as well as the Company's recovery of certain defense costs incurred relative to the CSAA matter, with interest. As a result, the Company recorded a $9.4 million pre-tax gain for this recovery during the second quarter of 1996. Additionally, in February 1997, the Company determined it was necessary to increase its estimate of anticipated liability for the costs associated with the verdict in the Security Life of Denver Insurance Company ("SLD") matter and as of December 31, 1996 recorded an additional $6.0 million for the costs in this matter (see Note 7 of Notes to Consolidated Financial Statements). The Company, as of December 31, 1995, provided for $20.1 million in estimated litigation costs arising from proceedings to which the Company was a party. The costs provided included, but were not limited to, legal fees paid or anticipated to be paid and other costs related to the Company's claims and defenses for those matters. In December 1994, the Company reached an agreement, which was subsequently approved on May 26, 1995 by the United States District Court for the District of South Carolina, to settle a shareholder class action. The Company's portion of the settlement and associated litigation costs resulted in a special charge of $34.2 million ($21.3 million after tax) in the fourth quarter of 1994. In March 1995, the Company and its insurance carrier signed an agreement to settle amounts contested and the carrier agreed to pay an additional amount of $1.7 million in full settlement of the Company's claims. Accordingly, the Company recorded a credit of $1.7 million, in the first quarter of 1995, as a further adjustment to the estimated costs of settling the securities class action. GAIN ON SALE OF HEALTH BUSINESS AND RELATED ASSETS During the first half of 1993, the Company experienced a significant decrease in revenues from its health services business unit. The Company evaluated various options and during the second quarter of 1995 committed to sell the health services business and cease to market any health insurance related software systems. In June 1995, the Company completed the sale of its health services unit for a total consideration of $9.3 million in cash. After selling expenses and other accrued costs, the Company recorded a pre-tax gain of $8.1 million (see Note 10 of Notes to Consolidated Financial Statements). BUSINESS ACQUISITION CHARGES During the fourth quarter of 1995, the Company recorded charges aggregating $2.6 million relating principally to costs, previously deferred, of an acquisition in Europe expected to close during the fourth quarter of 1995, that was not consummated ($1.2 million), and the settlement of certain contracts acquired through previous acquisitions ($1.4 million). PURCHASED RESEARCH AND DEVELOPMENT In connection with the October 1995 acquisition of micado, the Company expensed $14.5 million relating to purchased research and development. This amount was determined based on the estimated replacement cost related to the acquired technology for which technological feasibility has not been established and no alternative future use existed. LOSS ON DISPOSITION OF COMPUTER EQUIPMENT As a result of growth in the Company's existing client/user base, the addition of new outsourcing customers and advances in central processing unit technology, the Company, during the fourth quarter of 1995, restructured its data center equipment by beginning migration from BIPOLAR technology to newer CMOS technology. The Company entered into renewable lease agreements to acquire this technology, which will also allow the Company to take advantage of technological advances in this area without the large capital burden and lack of flexibility resulting from the purchase of such technology. As a result of the migration, the Company disposed of its existing data processing equipment, with a net book value of $18.0 million, for $4.2 million in cash, and recorded a one-time charge on the disposition of this equipment of $13.8 million. Concurrent with this technology upgrade, the Company upgraded certain of its data storage equipment to a more advanced architecture. As consideration for these storage systems upgrades, the Company exchanged existing data storage systems, with an aggregate net book value of $6.0 million, and paid $2.0 million cash, resulting in a one-time charge of $4.6 million. These charges, aggregating $18.4 million, are recorded under Loss on disposition of computer equipment for the year ended December 31, 1995. IMPAIRMENT AND RESTRUCTURING CHARGES During the fourth quarter of 1995, the Company recorded charges aggregating $6.7 million to write-off or write-down, as appropriate, the carrying values of certain identifiable intangible assets and goodwill related to prior business acquisitions ($5.2 million) and computer software ($1.5 million). OPERATING INCOME 1997 operating income increased 12.3% ($9.0 million) compared to 1996. Domestic property and casualty operating income increased 9.6%, domestic life and financial solutions operating income increased 44.6% and international operating income increased 31.8%. The increase in operating income is primarily related to increases in licensing and professional services revenues. Operating income, after the effects of the litigation settlement, litigation recovery and credit to impairment and restructuring expense, was $73.2 million for the year ended December 31, 1996. In May 1996, the Company recorded a $9.4 million pre-tax gain for the recovery of legal expenses following the resolution of the CSAA matter. At year end 1996, the Company also recorded a $6.0 million pre-tax charge following the judgment in the SLD matter. Operating income, after the effects of the gain from the sale of the health services business and special charges, was $19.6 million for the year ended December 31, 1995. These results include a gain from the sale of the Company's health services unit of approximately $8.1 million. Special charges aggregating $60.8 million recorded during the year ended December 31, 1995 relate to impairment and restructuring charges, net ($6.8 million), litigation settlement and other legal expenses ($18.5 million), charges incurred in connection with the restructure of the Company's data center facilities ($18.4 million), and certain charges related to business acquisitions ($17.1 million). Excluding special charges and credits, operating income for 1997 was $82.2 million compared to $69.5 million for 1996 and $72.1 million for 1995. Operating income, as a percentage of total revenues, excluding the effects of the special charges described above, was 14.1% for 1997, 14.2% for 1996 and 16.9% for 1995. A significant portion of both the Company's revenues 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 are recorded at the time systems are licensed, there can be significant fluctuations from quarter-to-quarter and year-to-year in the revenues and operating income derived from licensing activities. This is attributable principally to the timing of customers' decisions to enter into license agreements with the Company, which the Company is unable to control. Set forth below is a comparison of initial license revenues by quarter expressed as a percentage of annual initial license revenues and total revenues for each of the years presented:
First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ------- (Dollars in Millions) 1997 initial license revenues. . . . $11.3 $16.6 $16.9 $25.1 $ 69.9 % of annual initial license revenues 16.2% 23.8% 24.2% 35.8% 100.0% % of total revenues. . . . . . . . . 8.6% 11.8% 11.5% 15.3% 12.0% 1996 initial license revenues. . . . $10.4 $12.0 $10.1 $19.4 $ 51.9 % of annual initial license revenues 20.1% 23.2% 19.4% 37.3% 100.0% % of total revenues. . . . . . . . . 9.5% 10.6% 8.2% 13.7% 10.6% 1995 initial license revenues. . . . $11.9 $ 9.5 $11.3 $16.1 $ 48.8 % of annual initial license revenues 24.5% 19.4% 23.1% 33.0% 100.0% % of total revenues. . . . . . . . . 11.8% 9.1% 10.8% 14.0% 11.5%
OTHER INCOME AND EXPENSES Due to reduced levels of investable funds during 1997, interest income decreased $0.8 million compared to 1996. Interest expense was relatively unchanged. During 1996, the Company made large cash expenditures related to the October 1995 acquisition of micado ($6.4 million), the repurchase of 759,512 of the 1,519,024 shares of common stock held by GAP Coinvestment Partners and General Atlantic Investors 14 L.P. ($38.0 million) in March 1996 and the repurchase of 645,500 shares of the Company's outstanding common stock on the open market ($35.6 million) under its share repurchase authorization in March 1996. Consequently, the Company maintained a higher level of debt and a lower level of investable funds during 1996, resulting in an increase in interest expense of $1.7 million and a decrease in investment income of $0.4 million. INCOME TAXES The effective income tax rate (income taxes expressed as a percentage of pre-tax income) was 37.4%, 36.2% and 61.1% for the years ended December 31, 1997, 1996 and 1995, respectively The effective income tax rate for 1995 increased as a result of the Company's expensing, for book purposes, purchased research and development associated with its October 1995 acquisition of micado (see Note 2 of Notes to Consolidated Financial Statements), nondeductible write-offs of goodwill impairment (see Note 11 of Notes to Consolidated Financial Statements) and the nondeductible amortization of goodwill. These effects were offset, in part, by the higher tax basis than book basis of the assets divested related to the sale of the Company's health services unit (see Note 10 of Notes to Consolidated Financial Statements) and differences between the US tax rate and tax rates imposed on the income of foreign subsidiaries. DISCONTINUED OPERATIONS Income from operations of the discontinued property and casualty information services segment (before taxes) for 1997 decreased 66.0% compared to 1996, due primarily to the segment operating for only a portion of 1997. In August 1997, the Company completed the sale of substantially all of the assets of its property and casualty information services business for cash proceeds of $2.9 million. The Company retained the working capital of this business (approximately $14.3 million). This transaction produced a non-recurring gain of $1.7 million. Also, during the third quarter of 1997, the Company abandoned a related business. As a result, the Company recorded a non-recurring charge of $1.8 million, principally related to capitalized software. Income from operations of the discontinued property and casualty information services segment (before taxes) for 1996 increased 114.4% compared to 1995, due in part to restructuring costs of $3.9 million recorded in 1995 and an operating loss attributable to the risk services portion of the segment of approximately $4.2 million for 1995. NEW ACCOUNTING STANDARDS In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"), was issued. FAS 130 establishes standards for reporting and display of comprehensive income and its components, and is effective for fiscal years beginning after December 15, 1997. The adoption of FAS 130 is not expected to have a material effect on the Company's disclosures. In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"), was issued. FAS 131 is designed to improve the information provided in financial statements about the different types of business activities in which the enterprise engages and economic environments in which the enterprise operates, and is effective for fiscal years beginning after December 15, 1997, with earlier application encouraged. The Company adopted FAS 131 at December 31, 1997 and has included the appropriate disclosures in Note 12 of Notes to Consolidated Financial Statements. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP 97-2 provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions, and is effective for transactions entered into in fiscal years beginning after December 31, 1997. The adoption of SOP 97-2 is not expected to have a material impact on the Company's financial statements. In early 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use, and is effective for fiscal years beginning after December 31, 1998, with earlier application encouraged. The adoption of SOP 98-1 is not expected to have a material effect on the Company's financial statements. LIQUIDITY AND CAPITAL RESOURCES
December 31, 1997 1996 ------------------ (In Millions) Cash and equivalents, marketable securities and investments $ 46.5 $ 30.8 Current assets 185.8 160.3 Current liabilities 86.2 112.6 Working capital 99.6 47.7 Current portion of long-term debt 1.2 31.2 Long-term debt 37.7 34.3 Cash provided by operations $126.2 $ 96.8 Cash used by investing activities (95.2) (91.3) Cash used by financing activities (20.6) (18.7)
The Company's current ratio (current assets divided by current liabilities) stood at 2.2 at December 31, 1997, which management believes is sufficient when combined with the available credit facilities to provide for day-to-day operating needs and the flexibility to take advantage of investment opportunities. The Company has available (net of amounts outstanding at December 31, 1997) $163 million under its five year $200 million credit facility, should management choose debt financing for any of the Company's operating, investing or financing activities. Also, the Company has available an uncommitted $15.0 million operating line of credit with which it may choose to fund temporary operating cash needs. During 1997, the Company capitalized $62.5 million of internal software development costs principally related to the development of its S3+ client/server property and casualty software (including the incorporation of object-oriented technology and support for Microsoft Windows NT ) and CyberLife object-oriented client/server life insurance software, as well as other ongoing projects in support of its domestic and international product strategies. Significant expenditures planned for 1998, excluding any possible business acquisitions and stock repurchases, are as follows: acquisition of data processing and communications equipment, support software, buildings, building improvements and office furniture, fixtures and equipment and costs relating to the internal development of software systems. The Company has historically used the cash generated from operations for the development and acquisition of new products, acquisition of businesses and repurchase of the Company's stock. The Company anticipates that, subject to market conditions, it will continue to use its cash for all of these purposes in the future and that projected cash from operations will be able to meet presently anticipated needs; however, the Company may also consider incurring debt, as discussed above, as needed to accomplish specific objectives in these areas and for other general corporate purposes. FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's operating results and financial condition may be impacted by a number of factors, including, but not limited to, the following, any of which could cause actual results to vary materially from current and historical results or the Company's anticipated future results. Currently, the Company's business is focused principally within the global property and casualty and life insurance and financial solutions industries. Significant changes in the regulatory or market environment of these industries could impact demand for the Company's software products and services. Additionally, there is increasing competition for the Company's products and services, and there can be no assurance that the Company's current products and services will remain competitive, or that the Company's development efforts will produce products with the cost and performance characteristics necessary to remain competitive. Furthermore, the market for the Company's products and services is characterized by rapid changes in technology. The Company's success will depend on the level of market acceptance of the Company's products, technologies and enhancements, and its ability to introduce such products, technologies and enhancements to the market on a timely and cost effective basis, and maintain a labor force sufficiently skilled to compete in the current environment. Contracts with governmental agencies involve a variety of special risks, including the risk of early contract termination by the governmental agency and changes associated with newly elected state administrations or newly appointed regulators. The timing and amount of the Company's revenues are subject to a number of factors, including, but not limited to, the timing of customers' decisions to enter into large license agreements with the Company, which make estimation of operating results prior to the end of a quarter or year extremely uncertain. Additionally, while management believes that the Company's financing needs for the foreseeable future will be satisfied from cash flows from operations and the Company's currently existing credit facility, unforeseen events or adverse economic or business trends may significantly increase cash demands beyond those currently anticipated or affect the Company's ability to generate/raise cash to satisfy financing needs. A significant portion of both the Company's revenue and its operating income is derived from initial licensing charges received as part of the Company's software licensing activities. Because a substantial portion of these revenues is recorded at the time new systems are licensed, there can be significant fluctuations from period to period in the revenues and operating income derived from licensing activities. This is attributable principally to the timing of customers' decisions to enter into license agreements with the Company, which the Company is unable to control. The Company believes that current and potential customers' decisions to enter into license agreements with the Company may be significantly affected by strategies to make their existing information systems capable of handling the year 2000, however, at this time the Company is unable to predict what the future impact, if any, will be. Because of the foregoing factors, as well as other factors affecting the Company's operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. YEAR 2000 READINESS Many existing computer programs were designed to use only two digits to identify a year in date fields. If not corrected, these applications could fail or produce erroneous results when working with dates in the Year 2000 and beyond. This Year 2000 issue may potentially affect the Company in four areas: its product offerings, its services offerings, third-party products used internally, and its suppliers. The Company's various business units have been responsible for the assessment, remediation, validation and implementation of Year 2000 corrective actions. The application code of the Company's primary product offerings, S3+, Series II, INSURE/90 , POINT , CyberLife and CYBERTEK CK/4 products, were either initially designed or have been updated in their currently available releases to be capable of processing and storing date data with dates in both the twentieth (1900's) and twenty-first (2000's) centuries. The Company is currently conducting an inventory and verifying the Year 2000 readiness of the third-party products with which these Company applications are designed to operate in order to validate that no unanticipated Year 2000 issues exist. In addition, the Company also is in the process of conducting an inventory and assessing other Company and third-party products previously licensed by the Company to customers to determine if any renovation efforts may be required in relation to these products. In its services offerings, the Company has assessed and commenced Year 2000 remediation of the applications used in processing the data of its Information Technology Outsourcing ("ITO") and BPO services customers. Some of these remediation efforts are complete and some are still in various stages of coding, testing or implementation. The Company intends to complete these Year 2000 remediation efforts and required testing, in a Year 2000 test environment, prior to the need for these services to process data involving dates in the twenty-first century. The primary third-party products used by the Company for its internal operation include its data center hardware and software, internal financial systems, and network and PC hardware and software. The Company's Blythewood data center has completed its hardware and operating software inventory assessments and has substantially completed the remediation efforts of updating these hardware and software assets for the Year 2000 requirements. The Company's Australian and European data centers also have completed their inventory assessment and are implementing the hardware and operating software enhancements required for Year 2000 remediation. In 1996, the Company commenced the process of identifying, selecting and implementing an enterprise wide financial and human resources system to replace its existing systems. The selected solution is currently being implemented, is designed to meet Year 2000 requirements, and is scheduled to be operational at the end of 1998. In addition, the Company is commencing an inventory and assessing all of its network and PC hardware and software to determine if any Year 2000 remediation upgrades will be required. Finally, the primary suppliers upon whom the Company's services are dependent are electric utility and telephone companies who provide services to the Company's various offices and data centers. If these services are interrupted for a prolonged period due to the suppliers' Year 2000 problems, it will disrupt the Company's ability to provide its services to customers, notwithstanding the backup battery and diesel power supplies available for the data center locations. As discussed above, the Company has not yet fully completed its Year 2000 evaluations or its remediation efforts. If such remediation efforts are not completed on a timely basis, Year 2000 issues could have a material impact on the Company's operations and financial results. However, based upon the Company's experience to date, at this time, it is not anticipated that the completion of remaining Year 2000 remediation efforts will have an adverse material effect upon the Company's financial position or results of operations. SEASONALITY AND INFLATION The Company's operations have not proven to be significantly seasonal, though as with many companies in the software business, the fourth quarter tends to be the strongest quarter annually. Quarterly revenues and net income can be expected to vary at times. This is attributable principally to the timing of customers entering into license agreements with the Company. The Company is unable to control the timing of these decisions or fluctuations. The Company's domestic property and casualty segment has an outsourcing contract in Florida. In 1996, the state of Florida legislatively imposed six month homeowner policies as opposed to the normal twelve month policies. This decision was reversed later that year, but now has a carryover effect, which may last for several years and places most policy renewal dates in the latter part of the year. Since a significant percentage of the Company's revenue under this contract is derived from processing renewals, the carryover effect has caused a portion of the revenue to shift to the last half of the year. 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. ____________________________________________________ SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Statements in this annual report that are not descriptions of historical facts may be forward-looking statements that are subject to risks and uncertainties, including economic, competitive and technological factors affecting the Company's operations, markets, products, services and prices, as well as other specific factors discussed in Note 13 of Notes to Consolidated Financial Statements and elsewhere herein and in the Company's filings with the Securities and Exchange Commission. These and other factors may cause actual results to differ materially from those anticipated. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Supplementary Data Page REPORT OF INDEPENDENT ACCOUNTANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES: Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 27 Consolidated Balance Sheets as of December 31, 1997 and 1996 . . . . . . . . . . . . . . . 28 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 30 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 31 QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . 50 SUPPLEMENTAL SCHEDULES: Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . . . . . . . 51 Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Supplemental schedules other than those listed above are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or in the notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS POLICY MANAGEMENT SYSTEMS CORPORATION We have audited the accompanying consolidated balance sheets of Policy Management Systems Corporation as of December 31, 1997 and 1996 and the related statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Policy Management Systems Corporation and subsidiaries as of December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Atlanta, Georgia February 10, 1998
POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 1997 1996 1995 - ---------------------------------------------------------------------------------------- (In Thousands, Except Per Share Data) REVENUES: Licensing . . . . . . . . . . . . . . . . . . . . . . $132,811 $108,923 $102,092 Services. . . . . . . . . . . . . . . . . . . . . . . 449,971 379,307 323,521 --------- --------- --------- 582,782 488,230 425,613 --------- --------- --------- OPERATING EXPENSES: Cost of revenues Employee compensation and benefits. . . . . . . . . 232,519 180,825 140,304 Computer and communications expenses. . . . . . . . 34,745 31,812 27,408 Information services and data acquisition costs . . 31,562 28,809 28,941 Depreciation and amortization of property, equipment and capitalized software costs. . . . . 58,259 48,525 49,220 Other costs and expenses. . . . . . . . . . . . . . 39,709 42,914 32,804 Selling, general and administrative expenses. . . . . 93,383 75,615 65,664 Amortization of goodwill and other intangibles. . . . 10,454 10,240 9,142 Litigation settlement and expenses, net . . . . . . . - (3,422) 18,465 Gain on sale of Health business and related assets. . - - (8,139) Business acquisition charges. . . . . . . . . . . . . - - 2,573 Purchased research and development. . . . . . . . . . - - 14,500 Loss on disposition of computer equipment . . . . . . - - 18,422 Impairment and restructuring credits (charges), net . - (245) 6,755 --------- --------- --------- 500,631 415,073 406,059 --------- --------- --------- OPERATING INCOME. . . . . . . . . . . . . . . . . . . . 82,151 73,157 19,554 Equity in earnings of unconsolidated affiliates . . . . 1,189 - - OTHER INCOME AND EXPENSES: Investment income . . . . . . . . . . . . . . . . . . 1,528 2,316 2,764 Interest expense and other charges. . . . . . . . . . (5,111) (4,993) (3,307) --------- --------- --------- (3,583) (2,677) (543) --------- --------- --------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . 79,757 70,480 19,011 Income taxes. . . . . . . . . . . . . . . . . . . . . . 29,833 25,462 9,058 --------- --------- --------- INCOME FROM CONTINUING OPERATIONS . . . . . . . . . . . 49,924 45,018 9,953 DISCONTINUED OPERATIONS: Income (loss) from operations of discontinued P&C Information Services less applicable income taxes (benefit) of $238, $589, and $(4,116), respectively 397 979 (6,814) Loss on disposal of P&C Information Services, less applicable income tax benefit of $38. . . . . . . . (64) - - --------- --------- --------- 333 979 (6,814) --------- --------- --------- NET INCOME. . . . . . . . . . . . . . . . . . . . . . . $ 50,257 $ 45,997 $ 3,139 ========= ========= ========= BASIC EARNINGS PER SHARE: Income from continuing operations . . . . . . . . . . 2.74 2.42 0.51 Income from discontinued operations . . . . . . . . . 0.02 0.05 (0.35) --------- --------- --------- $ 2.76 $ 2.47 $ 0.16 ========= ========= ========= DILUTED EARNINGS PER SHARE: Income from continuing operations . . . . . . . . . . 2.65 2.39 0.51 Income from discontinued operations . . . . . . . . . 0.02 0.05 (0.35) --------- --------- --------- $ 2.67 $ 2.44 $ 0.16 ========= ========= ========= WEIGHTED AVERAGE COMMON SHARES. . . . . . . . . . . . . 18,234 18,604 19,391 ========= ========= ========= WEIGHTED AVERAGE COMMON SHARES ASSUMING DILUTION. . . . 18,833 18,833 19,630 ========= ========= ========= See accompanying notes.
POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 1997 1996 - ------------------------------------------------------------------------------------- (In Thousands, Except Share Data) ASSETS Current assets: Cash and equivalents. . . . . . . . . . . . . . . . . . . . . $ 32,179 $ 22,121 Marketable securities . . . . . . . . . . . . . . . . . . . . 3,280 2,234 Receivables, net of allowance for uncollectible amounts of $2,628 ($883 at 1996). . . . . . . . . . . . . . . . . . 128,789 116,113 Income tax receivable . . . . . . . . . . . . . . . . . . . . 1,098 1,383 Deferred income taxes . . . . . . . . . . . . . . . . . . . . 3,628 2,651 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,835 15,840 --------- -------- Total current assets. . . . . . . . . . . . . . . . . . . 185,809 160,342 Property and equipment, net . . . . . . . . . . . . . . . . . . 116,433 115,757 Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . 3,271 4,866 Income tax receivable . . . . . . . . . . . . . . . . . . . . . 4,041 4,041 Goodwill and other intangibles, net . . . . . . . . . . . . . . 69,125 83,363 Capitalized software costs, net . . . . . . . . . . . . . . . . 204,118 177,875 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 21,996 23,420 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 11,066 6,483 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,547 5,239 --------- -------- Total assets. . . . . . . . . . . . . . . . . . . . . . . $618,406 $581,386 ========= ======== LIABILITIES Current liabilities: Accounts payable and accrued expenses . . . . . . . . . . . . $ 57,345 $ 61,435 Accrued restructuring charges . . . . . . . . . . . . . . . . 145 2,478 Accrued contract termination costs. . . . . . . . . . . . . . 830 407 Current portion of long-term debt . . . . . . . . . . . . . . 1,191 31,222 Income taxes payable. . . . . . . . . . . . . . . . . . . . . 7,499 6,623 Unearned revenues . . . . . . . . . . . . . . . . . . . . . . 18,806 9,840 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397 631 --------- -------- Total current liabilities . . . . . . . . . . . . . . . . 86,213 112,636 Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . 37,714 34,268 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 80,496 67,538 Accrued restructuring charges . . . . . . . . . . . . . . . . . 1,366 1,340 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,121 2,352 --------- -------- Total liabilities . . . . . . . . . . . . . . . . . . . . 207,910 218,134 --------- -------- Commitments and contingencies (Note 7) STOCKHOLDERS' EQUITY Special stock, $.01 par value, 5,000,000 shares authorized. . . - - Common stock, $.01 par value, 75,000,000 shares authorized, 18,339,304 shares issued and outstanding (18,179,186 at 1996) 183 182 Additional paid-in capital. . . . . . . . . . . . . . . . . . . 112,090 106,104 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 306,367 256,110 Foreign currency translation adjustment . . . . . . . . . . . . (8,144) 856 --------- -------- Total stockholders' equity . . . . . . . . . . . . . . . . 410,496 363,252 --------- -------- Total liabilities and stockholders' equity. . . . . . . $618,406 $581,386 ========= ======== See accompanying notes.
POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Unrealized Foreign Holding Additional Currency Loss on Common Paid-In Retained Translation Marketable Stock Capital Earnings Adjustment Securities Total - --------------------------------------------------------------------------------------- (Dollars In Thousands) BALANCE, DECEMBER 31, 1994. . . $194 $170,323 $206,974 $ (451) $(118) $376,922 Net income. . . . . . . . . . . - - 3,139 - - 3,139 Stock options exercised (73,130 shares) . . . . . . . - 3,079 - - - 3,079 Unrealized holding gain on marketable securities . . . . . - - - - 118 118 Foreign currency translation adjustment. . . . . . . . . . - - - (586) - (586) ----- --------- -------- -------- ------ --------- BALANCE, DECEMBER 31, 1995. . . 194 173,402 210,113 (1,037) - 382,672 Net income. . . . . . . . . . . - - 45,997 - - 45,997 Stock options exercised (148,084 shares). . . . . . . 2 6,291 - - - 6,293 Repurchase of 1,405,012 shares of common stock . . . . . . . (14) (73,589) - - - (73,603) Foreign currency translation adjustment. . . . . . . . . . - - - 1,893 - 1,893 ----- --------- -------- -------- ------ --------- BALANCE, DECEMBER 31, 1996. . . 182 106,104 256,110 856 - 363,252 Net income. . . . . . . . . . . - - 50,257 - - 50,257 Stock options exercised (240,018 shares). . . . . . . 3 11,018 - - - 11,021 Repurchase of 79,900 shares of common stock . . . . . . . (2) (5,032) - - - (5,034) Foreign currency translation adjustment. . . . . . . . . . - - - (9,000) - (9,000) ----- --------- -------- -------- ------ --------- BALANCE, DECEMBER 31, 1997. . . $183 $112,090 $306,367 $(8,144) $ - $410,496 ===== ========= ======== ======== ====== ========= See accompanying notes.
POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 1997 1996 1995 - ---------------------------------------------------------------------------------------------- (In Thousands) OPERATING ACTIVITIES Net income . . . . . . . . . . . . . . . . . . . . . . . $ 50,257 $ 45,997 $ 3,139 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization. . . . . . . . . . . . 72,276 62,265 60,700 Deferred income taxes. . . . . . . . . . . . . . . . 13,365 20,392 (21,692) Provision for uncollectible accounts . . . . . . . . 2,951 510 567 Impairment charges . . . . . . . . . . . . . . . . . 75 - 6,756 Loss on disposition of computer equipment. . . . . . - - 18,422 Purchased research and development . . . . . . . . . - - 14,500 Business acquisition charges . . . . . . . . . . . . - - 2,573 Changes in assets and liabilities: Accrued restructuring and lease termination costs. . (2,307) (10,076) (1,713) Receivables. . . . . . . . . . . . . . . . . . . . . (14,032) (17,299) (5,901) Income tax receivable. . . . . . . . . . . . . . . . 285 667 24,981 Accounts payable and accrued expenses. . . . . . . . (4,422) (9,524) 16,911 Income taxes payable . . . . . . . . . . . . . . . . 876 4,805 (2,028) Other, net . . . . . . . . . . . . . . . . . . . . . 6,900 (955) (12,540) ---------- ---------- --------- Cash provided by operations . . . . . . . . . . 126,224 96,782 104,675 ---------- ---------- --------- INVESTING ACTIVITIES Proceeds from sales/maturities of available-for-sale securities. . . . . . . . . . . . 250 2,050 25,000 Purchases of available-for-sale securities . . . . . . . - - (19,966) Proceeds from maturities of held-to-maturity securities. - 1,000 5,736 Purchases of held-to-maturity securities . . . . . . . . - - (3,694) Investment in unconsolidated affiliate . . . . . . . . . (4,850) (2,315) - Acquisition of property and equipment. . . . . . . . . . (31,761) (28,852) (24,483) Capitalized internal software development costs. . . . . (62,508) (56,775) (46,770) Proceeds from sale of business segment . . . . . . . . . 2,900 - - Purchased software . . . . . . . . . . . . . . . . . . . - (1,192) (711) Proceeds from disposal of property and equipment . . . . 806 980 4,555 Contract acquisition costs . . . . . . . . . . . . . . . - - (10,000) Business acquisitions (6,178) (28,231) ---------- ---------- --------- Cash used by investing activities . . . . . . . (95,163) (91,282) (98,564) ---------- ---------- --------- FINANCING ACTIVITIES Payments on long-term debt . . . . . . . . . . . . . . . (181,219) (210,265) (20,002) Proceeds from borrowing under credit facilities. . . . . 154,634 258,862 27,678 Issuance of common stock under stock option plans. . . . 11,021 6,293 3,079 Repurchase of outstanding common stock . . . . . . . . . (5,034) (73,603) - ---------- ---------- --------- Cash provided (used) by financing activities. . (20,598) (18,713) 10,755 ---------- ---------- --------- Effect of exchange rate changes on cash. . . . . . . . . . . (405) 240 542 Net increase (decrease) in cash and equivalents. . . . . . . 10,058 (12,973) 17,408 Cash and equivalents at beginning of period. . . . . . . . . 22,121 35,094 17,686 ---------- ---------- --------- Cash and equivalents at end of period. . . . . . . . . . . . $ 32,179 $ 22,121 $ 35,094 ========== ========== ========= SUPPLEMENTAL INFORMATION Interest paid. . . . . . . . . . . . . . . . . . . . . . $ 5,005 $ 3,811 $ 2,323 Income taxes paid (refunded) . . . . . . . . . . . . . . 12,229 (2,193) 2,793 See accompanying notes.
POLICY MANAGEMENT SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements are prepared on the basis of generally accepted accounting principles and include the accounts of the Company and its subsidiaries, all of which are wholly-owned (collectively, the "Company"). All material intercompany balances and transactions have been eliminated. The equity method of accounting is used when the Company does not have effective control and has a 20% to 50% interest in other companies. Under the equity method, original investments are recorded at cost and adjusted by the Company's share of undistributed earnings or losses of these companies. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 global insurance and financial services industries. 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, if collectibility is probable and no significant vendor obligations remain. 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 and enhancements, which are provided under separate arrangements during the MESA term. The Company provides professional support services, including systems implementation and integration assistance, 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 does from time to time enter into certain joint development arrangements. Although these arrangements are varied, the Company principally will undertake custom development of a product or enhancement and typically retain all marketing rights and titles to such development. The Company does, however, have certain joint marketing arrangements. Joint development arrangements are generally provided for under fixed price agreements and in some circumstances on a time and material basis. The Company recognizes revenue on the same basis as professional support services; however, where technological feasibility has already been established, the Company will capitalize the portion of development costs which exceed customer funding provided under the joint development arrangement. The Company also offers information 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. Generally, agreements to provide information services have terms from one to five years, and in some cases month-to-month. Revenues from substantially all outsourcing and information services are recognized at the time the service is performed and losses, if any, are recognized in the period in which they are determined. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. MARKETABLE SECURITIES Debt securities included in the Company's investment portfolio for which there is a positive intent and ability to hold to maturity are carried at amortized cost. Debt securities that may be sold prior to maturity and all marketable equity securities are classified as available-for-sale and carried at fair value. The fair value is estimated based on quoted market prices for those or similar investments. Net unrealized gains and losses, determined on the specific identification method, on securities classified as available-for-sale are carried as a separate component of Stockholders' Equity. Realized gains and losses are included in net income and the cost of securities sold is based on the specific identification method. There were no sales of marketable securities during the years ended December 31, 1997 and 1996. PROPERTY AND EQUIPMENT Property and equipment, including support software acquired for internal use, is stated at cost less accumulated depreciation and amortization. Property and equipment is depreciated on a straight-line basis over its estimated useful life. Gains and losses on dispositions of property and equipment are determined based on the difference between the cash plus the fair value of any assets received (in the case of a nonmonetary transaction) less the net book value of the asset disposed of at the date of disposition. GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Assets to be Disposed Of" ("FAS 121"), requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the expected future cash flows of those assets are less than the assets' carrying amount. FAS 121 also addresses the accounting for long-lived assets that are expected to be sold or discarded. The Company adopted FAS 121 on January 1, 1996. Identifiable intangible assets and goodwill are recorded and amortized over their estimated economic lives or periods of future benefit. The lives established for these assets are a composite of many factors which are subject to change because of the nature of the Company's operations. This is particularly true for goodwill which reflects value attributable to the going-concern nature of acquired businesses, the stability of their operations, market presence and reputation. Accordingly, the Company evaluates the continued appropriateness of these lives and recoverability of the carrying value of such assets based upon the latest available economic factors and circumstances. The Company evaluates the recoverability of all long-lived assets, including specific intangible assets and goodwill, based upon a comparison of estimated future cash flows from the related operations with the then corresponding carrying values of those assets. Impairment of value, if any, is recognized in the period in which it is determined. A rate considered to be commensurate with the risk involved is used to discount the cash flows for any recognized impairment. The Company amortizes goodwill over an estimated life of 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 lives 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. 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. CAPITALIZED SOFTWARE COSTS In accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed," 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 over the estimated useful life, generally 3 to 5 years, at the greater of the amount computed using (i) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues of that product or (ii) the straight-line method. Costs which are capitalized as part of internally developed software primarily include direct and indirect costs associated with payroll, computer time and allocable depreciation and other direct allocable costs, among others. Product enhancements are improvements to an existing product that are intended to extend the life or significantly improve the marketability of the original product. Costs incurred for product enhancement are charged to expense as research and development until technological feasibility of the enhancement has been established. Upon release of the enhanced product, the unamortized value of the original product is added to the capitalized cost of the enhancement and amortized using the estimated life of the enhancement. 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 $0.6, $0.2 and $0.9 million for the years ended December 31, 1997, 1996 and 1995, respectively. The Company also recorded a write-off of $14.5 million representing purchased research and development costs during 1995 (see Note 2). The amount by which unamortized software costs exceeds the net realizable value, if any, is recognized in the period it is determined. INCOME TAXES The provision for income taxes and corresponding balance sheet accounts are determined in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). Under FAS 109, the deferred tax liabilities and assets are determined based on temporary differences between the basis of certain assets and liabilities for income tax and financial reporting purposes. These differences are primarily attributable to differences in the recognition of depreciation and amortization of property, equipment and intangible assets and certain software development costs and revenues. BASIC AND DILUTED EARNINGS PER SHARE Basic and diluted earnings per share ("EPS") are calculated according to the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). For the Company, the numerator is the same for both basic and diluted EPS. The following is a reconciliation of the denominator used in the calculation:
Year ended December 31, 1997 1996 1995 Weighted Average Shares - -------------------------------------------------------- (In Thousands) Basic EPS. . . . . . . . . . . . 18,234 18,604 19,391 Effect of common stock options . 599 229 239 ------ ------ ------ Diluted EPS. . . . . . . . . . . 18,833 18,833 19,630 ====== ====== ======
Options to purchase 243,050, 3,000 and 375,000 shares of common stock at $69.38, $66.00 and $81.90 per share, respectively, were outstanding but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price for the Company's common stock for the period. FOREIGN CURRENCY TRANSLATION The local currencies of the Company's foreign subsidiaries have been determined to be their functional currencies. Assets and liabilities of foreign subsidiaries are translated into United States dollars at current exchange rates and resulting translation adjustments are included as a separate component of 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. NEW ACCOUNTING STANDARDS In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"), was issued. FAS 130 establishes standards for reporting and display of comprehensive income and its components, and is effective for fiscal years beginning after December 15, 1997. The adoption of FAS 130 is not expected to have a material effect on the Company's disclosures. In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"), was issued. FAS 131 is designed to improve the information provided in financial statements about the different types of business activities in which the enterprise engages and economic environments in which the enterprise operates, and is effective for fiscal years beginning after December 15, 1997, with earlier application encouraged. The Company adopted FAS 131 at December 31, 1997 and has included the appropriate disclosures in Note 12. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP 97-2 provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions, and is effective for transactions entered into in fiscal years beginning after December 31, 1997. The adoption of SOP 97-2 is not expected to have a material impact on the Company's financial statements. In early 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use, and is effective for fiscal years beginning after December 31, 1998, with earlier application encouraged. The adoption of SOP 98-1 is not expected to have a material effect on the Company's financial statements. OTHER MATTERS Certain prior year amounts have been reclassified or restated to conform to current year presentation. See also Note 12. NOTE 2. ACQUISITIONS In August 1996, the Company acquired certain assets of Co-Cam Pty Ltd. and related entities ("Co-Cam") for approximately $6.0 million. Co-Cam, headquartered in Australia, is principally a software and services provider for superannuation and pension administration systems. The acquisition has been recorded using the purchase method of accounting. Accordingly, the Consolidated Statement of Operations of the Company for the year ended December 31, 1996, includes the results of operations of Co-Cam from the date of acquisition. In October 1995, the Company acquired micado Beteiligungs-und Verwaltungs GmbH ("micado"). Headquartered in Germany, micado is principally a software provider to German insurance and financial services companies. The acquisition was financed principally from cash provided by operations and borrowings under the Company's credit facilities. The acquisition has been recorded using the purchase method of accounting. Accordingly, the Consolidated Statement of Operations for the year ended December 31, 1995, includes the results of operations of micado from the date of acquisition. In connection with the acquisition, the Company recorded an estimated liability of $0.4 million at October 1, 1995, included in Impairment and restructuring charges, net, in the accompanying Consolidated Statements of Operations, to provide for certain relocation and severance costs of consolidating existing operations in Germany with micado. At October 1, 1995, the Company also recorded a charge of $14.5 million representing purchased research and development for which technological feasibility had not yet been established and for which there is no alternative future use. Under the terms of the purchase agreement, payment of approximately $6.2 million of the purchase price was deferred at the date of acquisition and was paid during 1996. The total costs of the acquisition were determined, and assigned to the net assets acquired, as follows:
micado 1995 -------- (In Thousands) Total consideration paid. . . . . . . . . . . . . . . . . . . . . . . . . . . $30,806 Direct costs of acquisition . . . . . . . . . . . . . . . . . . . . . . . . . 915 ------- Total cost to be assigned to net assets acquired. . . . . . . . . . . . . . . 31,721 Add - Liabilities assumed. . . . . . . . . . . . . . . . . . . . . . . . . . 12,762 Less - Cost assigned to tangible and identifiable intangible assets acquired 25,840 - Write-off of purchased research and development . . . . . . . . . . . 14,500 ------- Cost assigned to goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,143 =======
Supplemental pro-forma information is not presented since this acquisition was not material to the Company's consolidated results of operations in the year of acquisition. During the fourth quarter of 1995, the Company recorded charges aggregating $2.6 million relating principally to costs, previously deferred, of an acquisition in Europe which was expected to close during the fourth quarter of 1995 and was not consummated. NOTE 3. PROPERTY AND EQUIPMENT A summary of property and equipment is as follows:
Estimated December 31, Useful Life 1997 1996 - ----------------------------------------------------------------------------- (Years) (In Thousands) Cost: Land. . . . . . . . . . . . . . . . . . . . . - $ 2,729 $ 2,729 Buildings and improvements. . . . . . . . . . 10-40 63,717 63,670 Construction in progress. . . . . . . . . . . - 1,338 232 Leasehold improvements. . . . . . . . . . . . 1-10 3,872 2,799 Office furniture, fixtures and equipment. . . 5-15 51,324 46,389 Computer and communications equipment and support software. . . . . . . . . . . . 2-5 127,621 115,966 Other . . . . . . . . . . . . . . . . . . . . 3-5 5,354 6,434 ---------- ---------- 255,955 238,219 Less: Accumulated depreciation and amortization (139,522) (122,462) ---------- ---------- Property and equipment, net $ 116,433 $ 115,757 ========== ==========
Depreciation and amortization charged to expense was $27.6, $23.7, and $28.1 million for the years ended December 31, 1997, 1996 and 1995, respectively. As a result of growth in the Company's existing client/user base, the addition of new outsourcing customers and advances in central processing unit technology, the Company, during the fourth quarter of 1995, restructured its data center equipment by beginning migration from BIPOLAR technology to newer CMOS technology. The Company entered into renewable lease agreements for this technology. As a result of the migration, the Company disposed of its existing central processing unit and associated equipment, with a net book value of $18.0 million, for $4.2 million in cash, and recorded a one-time charge on the disposition of this equipment of $13.8 million. Concurrent with this technology upgrade, the Company upgraded certain of its data storage equipment to a more advanced architecture. As consideration for these storage systems upgrades, the Company exchanged existing data storage systems, with an aggregate net book value of $6.0 million, and paid $2.0 million cash, resulting in a one-time charge of $4.6 million. These one-time charges, aggregating $18.4 million, are recorded under Loss on disposition of computer equipment in the accompanying Consolidated Statement of Operations for the year ended December 31, 1995. NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS A summary of goodwill and other intangible assets is as follows:
December 31, 1997 1996 - --------------------------------------------------------------- (In Thousands) Goodwill. . . . . . . . . . . . . . . . . $ 61,884 $ 65,639 Customer lists. . . . . . . . . . . . . . 19,922 20,860 Contract acquisition costs. . . . . . . . 15,000 15,000 Covenants not to compete. . . . . . . . . 4,660 5,136 Other . . . . . . . . . . . . . . . . . . 6,066 6,662 --------- --------- 107,532 113,297 Less: Accumulated amortization. . . . . . (38,407) (29,934) --------- --------- Goodwill and other intangible assets, net $ 69,125 $ 83,363 ========= =========
Amortization charged to expense was $10.6, $10.4 and $9.3 million for the years ended December 31, 1997, 1996 and 1995, respectively. Goodwill and other intangible assets with an aggregate carrying value of $5.2 million were written off as part of impairment and restructuring charges recorded during the year ended December 31, 1995 (see Note 11). NOTE 5. CAPITALIZED SOFTWARE COSTS A summary of capitalized software costs is as follows:
December 31, 1997 1996 - -------------------------------------------------------- (In Thousands) Internally developed software . $ 329,552 $ 267,461 Purchased software. . . . . . . 26,315 29,518 ---------- ---------- 355,867 296,979 Less: Accumulated amortization. (151,749) (119,104) ---------- ---------- Capitalized software costs, net $ 204,118 $ 177,875 ========== ==========
Amortization charged to expense was $33.9, $28.1 and $23.2 million for the years ended December 31, 1997, 1996 and 1995, respectively. Purchased software with an aggregate carrying value of $1.5 million was written off as part of impairment and restructuring charges recorded during the year ended December 31, 1995 (see Note 11). NOTE 6. LONG-TERM DEBT AND OTHER BORROWINGS Long-term debt is as follows:
December 31, 1997 1996 - ---------------------------------------------- (In Thousands) Credit facility borrowings . $37,000 $62,000 Notes payable. . . . . . . . 1,905 3,490 ------- ------- 38,905 65,490 Less: Current portion. . . . 1,191 31,222 ------- ------- Long-term debt . . . . . . . $37,714 $34,268 ======= =======
On August 8, 1997, the Company entered into a new credit facility for $200 million with a syndicate of financial institutions to provide an additional source of funds for general corporate purposes. The facility bears a term of five years. Borrowings under the facility bear interest payable at per annum rates based upon the London Interbank Offering Rate plus a spread above certain of these rates ranging from 0.225% to 0.350% dependent upon certain financial ratios of the Company. Additionally, the Company pays a per annum facility fee on the aggregate amount of the commitments ranging from 0.10% to 0.15%. The Company is subject to certain covenants including, but not limited to, the maintenance of certain operating ratios and levels of tangible net worth. The average interest rate applicable to borrowings under credit facilities was 6.01% and 6.16% for the years ended December 31, 1997 and 1996, respectively. NOTE 7. COMMITMENTS AND CONTINGENCIES COMMITMENTS On March 27, 1995, the Company entered into a long-term license and maintenance agreement in order to acquire rights to certain operating system management software products for use in the Company's worldwide data center operations. The agreement, which has an initial term of ten years, may be renewed and extended for an additional period of five years, subject to mutual agreement and other modifications. Minimum contract payments by the Company over the initial ten-year term aggregate $33.0 million payable in specified annual installments which escalate over the ten-year period. In addition to minimum contract payments, the Company will pay an annual supplemental revenue fee, subject to certain provisions in the agreement, equal to a specified annual percentage of the Company's applicable prior year annual gross revenues, less the specified annual installment for such period. Minimum contract payments will be expensed on a straight-line basis over the initial ten-year term. Annual supplemental revenue fees, if any, will be accrued in the period in which determined. The agreement provisions for the supplemental revenue fee were not met for 1996, and the Company made no supplemental payment in 1997 for the 1996 period. On April 7, 1995, the Company finalized certain terms of a ten-year agreement with an insurance holding company and its subsidiaries, initially entered into in November 1994. The Company is to provide certain data processing and other professional services as required. The minimum contractual processing revenues are expected to be in excess of $60 million over the term of the agreement. The Company incurred costs of $10 million related to this agreement in the second quarter of 1995 ($5 million in the fourth quarter of 1994), which have been deferred as contract acquisition costs and are being expensed on a straight-line basis over the term of the agreement. At December 31, 1997, the net unamortized amounts related to this continuing agreement, included in other intangible assets, were $10.8 million. During 1997, the Company entered into two five year renewable lease and maintenance agreements to lease certain data processing equipment for use in its worldwide data center operations. Minimum lease payments over the initial terms of the agreements aggregate $8.6 million payable in specified monthly installments. At the end of the term of each agreement, the Company has the option to purchase the leased equipment at fair market value, upgrade the equipment with the latest technology, or discontinue each lease. 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 $10.0, $7.7 and $7.1 million for the years ended December 31, 1997, 1996 and 1995, respectively. The Company leased certain data processing and related equipment primarily under operating leases expiring through 2003. Rent expense under operating leases for such equipment was $7.9, $7.5 and $4.9 million for the years ended December 31, 1997, 1996 and 1995, respectively. Future minimum lease obligations under noncancelable operating leases are stated below and include payments over 17 years aggregating $3.4 million related to a leasehold planned for future abandonment, net of subleases (in thousands):
Year Ending December 31, - ------------------------ 1998 . . . . . . $13,860 1999 . . . . . . 12,120 2000 . . . . . . 11,221 2001 . . . . . . 9,970 2002 . . . . . . 7,083 Thereafter . . . 10,762 ------- Total. . . . . . $65,016 =======
CONTINGENCIES - LEGAL PROCEEDINGS In March 1994, Security Life of Denver Insurance Company ("SLD") brought suit against the Company in the United States District Court for the District of Colorado alleging breach of a life insurance joint development contract, unfair trade practices, and fraud. SLD sought direct, indirect, consequential, and punitive damages in excess of $80 million. In February 1997, following a jury trial, the Court and jury entered judgment in favor of the Company against SLD on the claims of fraud and unfair trade practices. A verdict and judgment was returned against the Company for breach of contract and damages of $3.5 million, together with pre-judgment interest. In addition, the jury found that SLD was using the Company's trade secrets without permission. As a result of post trial motions, the judgment was amended to delete the award of pre-judgment interest and SLD was ordered to return the Company's systems. Both the Company and SLD have appealed to the United States Court of Appeals. Changes in the status of this proceeding could result in a change in the Company's estimate of anticipated liability for the costs associated with these matters. The Company is also presently involved in litigation which commenced in January of 1996 in the Circuit Court in Greenville County, South Carolina, with Liberty Life Insurance Company and certain of its affiliates ("Liberty") arising out of the parties' prior contractual relationship related to the development and licensing of Series III life insurance systems and the subsequent licensing of the Company's CYBERTEK life insurance systems. Liberty's complaint alleges breach of contract, breach of express and implied warranties, fraudulent inducement, breach of contract accompanied by a fraudulent act, and recission. Liberty has alleged actual and consequential damages in excess of $160 million and also seeks treble and punitive damages. The Company has asserted various affirmative defenses and is pursuing counterclaims against Liberty for breach of contract, recoupment, breach of good faith and fair dealing, and breach of contract accompanied by a fraudulent act. The Company is seeking equitable relief, including injunctive relief, and currently unspecified actual, compensatory and consequential damages. Based upon the allegations raised in a prior lawsuit and the SLD lawsuit, the Company's insurer, St. Paul Mercury Insurance Company ("St. Paul"), commenced in June 1995 a declaratory judgment action in the United States District Court for the District of South Carolina against the Company to determine St. Paul's obligation for defense costs and to indemnify the Company for any payment related to these claims. The Company filed a counterclaim against St. Paul seeking to recover the Company's defense costs in both matters, coverage for damages, if any, awarded in those matters, and consequential and punitive damages. In connection with the dismissal of the prior lawsuit, St. Paul and the Company agreed to dismiss with prejudice all claims against each other with respect to the matter, and St. Paul agreed to reimburse the Company for the Company's legal fees. The action continues as to the parties' claims related to insurance coverage for the SLD matter. In addition to the litigation described above, there are also various other litigation proceedings and claims arising in the ordinary course of business. The Company believes it has meritorious defenses and is vigorously defending these matters. While the resolution of any of the above matters could have a material adverse effect on the results of operations in future periods, the Company does not expect these matters to have a material adverse effect on its consolidated financial position. The Company, however, is unable to predict the ultimate outcome or the potential financial impact of these matters. NOTE 8. INCOME TAXES A reconciliation of the difference between the actual income tax provision and the expected provision, computed using the applicable statutory rate, is as follows:
Year ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------- Provision for taxes at the statutory rate . . . . . . . . 35.0% 35.0% 35.0% Increase (decrease) in provision from: Goodwill. . . . . . . . . . . . . . . . . . . . . . . . 1.1 (3.4) (31.4) Revaluation of deferred state income tax liability. . . - - (4.0) Purchased research and development. . . . . . . . . . . - - 62.7 Nontaxable investment income. . . . . . . . . . . . . . (0.1) - (1.8) State and local income taxes, net of federal tax effect 1.3 1.8 3.0 Differences in foreign and US tax rate. . . . . . . . . 0.6 - (23.2) Deferred tax asset valuation allowance. . . . . . . . . - - 14.8 Other . . . . . . . . . . . . . . . . . . . . . . . . . (0.5) 2.8 6.0 ----- ----- ------ 2.4 1.2 26.1 ----- ----- ------ Effective income tax provision rate . . . . . . . . . . . 37.4% 36.2% 61.1% ===== ===== ======
An analysis of the income tax provision is as follows:
Year ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------ (In Thousands) Current domestic taxes . . . . . . . . . . . . . . . . . $ 4,947 $ 2,494 $(1,858) Current foreign taxes. . . . . . . . . . . . . . . . . . 8,464 4,835 3,309 ------- ------- -------- Total current taxes. . . . . . . . . . . . . . . . . . 13,411 7,329 1,451 ------- ------- -------- Deferred income taxes relating to temporary differences: Depreciation and amortization of property, equipment and intangibles . . . . . . . 2,138 664 (1,748) Capitalized software development costs . . . . . . . . 10,917 10,511 8,876 Impairment and restructuring of operations . . . . . . 865 3,120 1,312 Revaluation of deferred state income tax liability . . - - (497) Litigation settlement and expenses, net. . . . . . . . 1,754 4,184 (3,445) Other. . . . . . . . . . . . . . . . . . . . . . . . . 948 243 (1,007) ------- ------- -------- 16,622 18,722 3,491 ------- ------- -------- Total income tax provision . . . . . . . . . . . . . . . $30,033 $26,051 $ 4,942 ======= ======= ========
An analysis of the net deferred income tax liability is as follows:
December 31, 1997 1996 - --------------------------------------------------------------- (In Thousands) Current deferred assets: Net operating loss carryforward. . . . . . $ 515 $ 176 Restructuring loss from foreign operations 196 790 Other. . . . . . . . . . . . . . . . . . . 2,917 1,685 ------- -------- Current deferred assets. . . . . . . . . 3,628 2,651 ------- -------- Long-term deferred assets: State tax credits. . . . . . . . . . . . . 285 907 Net operating loss carryforward. . . . . . 7,567 9,095 Foreign tax credit carryforward. . . . . . 5,197 3,846 Other. . . . . . . . . . . . . . . . . . . 8,947 9,572 ------- -------- Long-term deferred assets. . . . . . . . 21,996 23,420 ------- -------- Total deferred assets. . . . . . . . . $25,624 $26,071 ======= ======== Long-term deferred liabilities: Depreciation and amortization of property, equipment and intangibles. . . . . . . . $14,709 $15,899 Capitalized software development costs . . 63,911 53,844 Other. . . . . . . . . . . . . . . . . . . 1,876 (2,205) ------- -------- Total deferred liabilities . . . . . . $80,496 $67,538 ======= ========
The Company generated a $23.9 million net operating loss for the year ended December 31, 1995 for federal and state tax purposes. These loss carryforwards expire in 2010. Certain foreign subsidiaries of the Company have net operating loss carryforwards at December 31, 1997 totaling approximately $5.1 million, which may be used to offset future taxable income. The foreign carryforwards have no expiration period. No provision has been made for federal income taxes on unremitted earnings of certain of the Company's foreign subsidiaries (approximately $28 million at December 31, 1997) since the Company plans to permanently reinvest all such earnings. However, if such earnings were remitted, there would be additional federal income tax expense of $2.3 million. The Company has foreign tax credit carryforwards at December 31, 1997 of $5.2 million which will expire as follows: $3.8 million on December 31, 2000, and $1.4 million on December 31, 2001. The Company recorded a valuation allowance of $3.1 million at December 31, 1995 related to certain deferred tax assets that are not anticipated to be utilized through normal operating results. NOTE 9. EMPLOYEE BENEFIT PLANS PROFIT SHARING PLAN AND TRUST Prior to July 1, 1995, eligible employees were covered under the Policy Management Systems Corporation Profit Sharing Plan and Trust. The Company's contributions to this Plan were determined by the Board of Directors of the Company. Employees made no contributions to this Plan. The Company made no contributions to the Plan for 1995 and on July 1, 1995, all accounts of all participants in this Plan were merged into the Company's 401(k) Retirement Savings Plan. 401(K) RETIREMENT SAVINGS PLAN The Company offers the Policy Management Systems Corporation 401(k) Retirement Savings Plan to eligible employees. Effective January 1, 1995, the Company began matching 100% of the first 3% of salary contributed by the participant and matching 50% of the next 3% of salary contributed by the participant. Subject to limits imposed by the Internal Revenue Service, the Internal Revenue Code and the Plan, participants may also make additional before-tax and after-tax contributions that are not subject to matching contributions by the Company. Participants have several options as to how their contributions and vested Company contributions are invested. Effective July 1, 1995, non-vested and current Plan year Company contributions are invested in common stock of the Company. The Company's contribution on behalf of participating employees was $3.8, $3.3 and $3.6 million for the years ended December 31, 1997, 1996 and 1995, respectively. STOCK OWNERSHIP PLAN In May 1995, the Company established a stock ownership plan through which eligible employees of the Company and its participating affiliates may acquire shares of the Company's common stock through regular payroll deductions. Participants may make after-tax contributions in multiples of $5.00, with a minimum deduction per pay period of $10.00 and a maximum deduction per pay period of the lesser of $900.00 or 10% of regular salary. The Company makes a matching contribution equal to 15% of participants contributions. Participants who withdraw shares acquired under the Plan within two years of the date of purchase are ineligible to make further contributions to purchase shares under the Plan for twelve months after such withdrawal. STOCK OPTION PLANS The Company currently 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 and its subsidiaries. Options under these plans expire ten years after the grant date except that options under the 1993 Long Term Incentive Plan for Executives (the "1993 Plan") expire in January 2003. During 1997, options were granted under the 1989 Stock Option Plan only. During 1996 and 1995, options were granted under the 1993 Plan and the 1989 Stock Option Plan. Options granted under all plans except the 1993 Plan have exercise prices at 100% of market value at date of grant and generally become exercisable either at the rate of 20%, 25% or 33 1/3% per year (cumulative) beginning one year from date of grant. Participants in the 1993 Plan have exercise rights as a percentage of market value at date of grant as follows: 1993 - 105%; 1994 - 104%; 1995 - 103%; 1996 - 102%; 1997 - 101%; and 1998 - 100%. Options granted under the Plan in 1993 become exercisable as follows: 25% on January 1, 1995; 25% on January 1, 1997; and 50% on January 1, 1999. For individuals who were or may be selected to participate in the Plan, and for additional options which were or may be granted to participants due to promotions, the number of options granted and what percentage becomes exercisable on the above dates are determined according to formulas described in the Plan. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). This Statement requires that companies with stock-based compensation plans either recognize compensation expense based on new fair value accounting methods or continue to apply the provisions of Accounting Principles Board Opinion No. 25 and disclose pro forma net income and earnings per share assuming the fair value method had been applied. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FAS 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals (or exceeds) the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by FAS 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of 5.7%, 6.4% and 6.5%; volatility factors of the expected market price of the Company's common stock of 35.4%, 37.5% and 39.7%; and weighted-average expected life of the options of 4.4, 5.0 and 5.1 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information):
Year Ended December 31, 1997 1996 1995 - ----------------------------------------------------------------------------- (In Thousands Except Per Share Data) Net Income As reported . . . . . . . . . . . . . . . . . . $50,257 $45,997 $3,139 Pro forma . . . . . . . . . . . . . . . . . . . 43,698 41,789 2,161 Basic earnings per share As reported . . . . . . . . . . . . . . . . . . $ 2.76 $ 2.47 $ 0.16 Pro forma . . . . . . . . . . . . . . . . . . . 2.40 2.25 0.11 Diluted earnings per share As reported . . . . . . . . . . . . . . . . . . $ 2.67 $ 2.44 $ 0.16 Pro forma . . . . . . . . . . . . . . . . . . . 2.32 2.22 0.11
Option activity under all of the stock option plans is summarized as follows:
Year Ended December 31, 1997 1996 1995 ----------------- ----------------- ----------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - -------------------------------------------------------------------------------------------------- Outstanding at beginning of year . . . 3,458,882 $48.95 3,106,164 $49.78 2,804,328 $50.56 Granted. . . . . . . . . . . . . . . . 609,750 45.89 589,468 42.82 674,359 47.99 Exercised. . . . . . . . . . . . . . . (240,018) 37.44 (148,084) 36.34 (73,130) 37.48 Forfeited. . . . . . . . . . . . . . . (30,724) 45.92 (88,666) 58.35 (299,393) 56.04 ---------- ---------- ---------- Outstanding at end of year . . . . . . 3,797,890 $49.21 3,458,882 $48.95 3,106,164 $49.78 ========== ========== ========== Options exercisable at year end. . . . 1,685,592 1,218,203 1,119,562 Shares available for future grant. . . 914,734 1,304,260 1,995,162 Weighted-average fair value of options granted during the year $17.39 $18.72 $21.52
The following table summarizes information about fixed options outstanding at December 31, 1997:
Options Outstanding Options Exercisable ----------------------- ---------------------- Weighted- Average Weighted- Weighted- Range of Remaining Average Average Exercise Contractual Exercise Exercise Prices Shares Life Price Shares Price - ------------------------------------------------------------- 24 to 30 . . 168,230 5.8 years $29.59 168,230 $29.59 31 to 36 . . 509,935 6.8 years 34.34 212,345 33.73 43 to 49 . . 2,032,734 7.5 years 45.62 625,704 45.20 50 to 54 . . 465,941 6.4 years 51.29 248,763 50.24 66 to 82 . . 621,050 4.9 years 76.92 430,550 74.83 --------- --------- 3,797,890 1,685,592 ========= =========
NOTE 10. CERTAIN TRANSACTIONS DISCONTINUED OPERATIONS On August 31, 1997, the Company completed the sale of substantially all of the assets of its property and casualty information services business for cash proceeds of $2.9 million. The Company retained the working capital of this business (approximately $14.3 million). This transaction produced a non-recurring gain of $1.7 million. Also, during the third quarter of 1997, the Company abandoned a related business. As a result, the Company recorded a non-recurring charge of $1.8 million, principally related to capitalized software. OTHER During 1997, the Company repurchased 79,900 shares of the Company's stock on the open market. During the second quarter of 1997, the property and casualty segment executed a license agreement covering a package of several of the Company's information access and electronic commerce software products for $1.8 million with Insurance Information Exchange L.L.C., the purchaser of the discontinued property and casualty information services. On April 8, 1996, the Company repurchased 759,512 of the 1,519,024 shares of the Company's common stock held by GAP Coinvestment Partners and General Atlantic Partner 14 L.P. (collectively "General Atlantic Investors") and the remainder of the Company's shares owned by General Atlantic Investors were purchased by Continental Casualty Company, a licensee of the Company's S3+ solutions. The repurchase by the Company, at a price of $50.00 per share, resulted in an aggregate cash expenditure (after related costs) of approximately $38.7 million. Also during 1996, the Company repurchased 645,500 shares of its common stock on the open market. There were no shares repurchased during the twelve months ended December 31, 1995. On June 30, 1995, the Company sold its health services unit for a total consideration of $9.3 million in cash. After selling expenses of $0.5 million, the net book value of assets sold of $0.5 million, liabilities resulting from the sale, including severance liabilities for certain employees and other reserves of $1.5 million, and the present value of a sublease executed by the purchaser for certain office space of $1.3 million, the Company recorded a pre-tax gain of $8.1 million, for the year ended December 31, 1995. NOTE 11. IMPAIRMENT AND RESTRUCTURING CHARGES During 1995, the Company continued to examine its options to improve the overall performance of the risk information services business. The risk information services business continued to reflect declining sales and earnings, reporting revenues of $22.7 million for the year ended December 31, 1995 and an operating loss of $4.2 million. As a result of its continued detailed business assessment, the Company determined that there were no further services or investment alternatives that could bring these operations to profitability and that the cash losses related to the risk information services business would continue into the future. As a result, the Company decided to restructure its property and casualty information services business and cease providing certain data collection services, including property inspections, commercial audits and pre-employment checks. The Company sold the pre-employment business and completely ceased and abandoned operations in property inspections and commercial audits. As a result, the Company recorded, at December 31, 1995, restructuring charges of $3.7 million for disposal and severance charges related to exiting these operations. This amount is included in discontinued property and casualty information services segment results. In 1995, the Company performed a detailed assessment of the on-site medical correspondence information services business and determined that the expected future cash flows of this business did not support the carrying value of the related goodwill and identifiable intangible assets. As a result, at October 1, 1995, the Company recorded impairment charges of $1.8 million to write-off the carrying value of the identifiable intangible assets ($1.1 million) and goodwill ($0.7 million). As part of a 1983 business acquisition, the Company acquired a billing and collection system (CABILS), which was originally utilized in specialty processing or the processing of assigned risk business for the Company's customers (principally those customers acquired in the business acquisition) and, later, evolved into the basis for a portion of the Company's full property and casualty total policy management processing for voluntary as well as assigned risk business. During 1995, several of the Company's customers of this business opted to either move some or all states served by them to LAD servicing carriers or to not renew their agreements for these services for other reasons. In addition, the Texas Plan implemented rate increases and a mandatory takeout plan which had the effect of further decreasing the number of policies served by the Company. During 1995, the Company decided to migrate its property and casualty total policy management processing to its S3+ technology, replacing the software acquired in 1983. Based on a detailed business assessment performed by the Company, the anticipated cash flows for this business for the period until the S3+ migration was completed did not support the carrying value of the software and related goodwill associated with this business. As a result, the Company recorded, at October 1, 1995, impairment charges of $2.8 million to write-off the carrying value of the software ($0.4 million) and related goodwill ($2.4 million). During 1995, the Company ceased the active marketing of certain processing software utilized in the processing of individual accident and health business by the Company's life and financial solutions business. A cash flow valuation performed by the Company indicated that the expected future cash flows of this business did not entirely support the carrying value of the goodwill associated with this business, which was originally acquired in 1987. As a result, the Company recorded at December 31, 1995 impairment charges of $0.9 million to write-down the carrying value of the related goodwill to its estimated net realizable value. The Company determined that a development and design tool used in the development of certain of its property and casualty software no longer provided significant service potential to the Company's development efforts. As the Company's license for the tool is non-transferable, the Company recorded an impairment charge at October 1, 1995 of $1.1 million to write-off the remaining carrying value of this software. NOTE 12. SEGMENT INFORMATION The Company has classified its operations into five operating segments and revised its segment information accordingly. The operating segments are the five revenue-producing components of the Company for which separate financial information is produced for internal decision making and planning purposes. The segments are as follows: 1. Property and casualty enterprise software and services (generally referred to as the "domestic property and casualty business"). This segment provides software products, product support, professional services and outsourcing primarily to the US property and casualty insurance market. 2. Life and financial solutions enterprise software and services (generally referred to as the "domestic life and financial solutions business"). This segment provides software products, product support, professional services and outsourcing primarily to the US life insurance and financial services markets. In 1995, this segment included the Company's health services unit which was sold in June 1995. 3. International. This segment provides software products, product support, professional services, outsourcing and information services to the property and casualty and life insurance markets primarily in Canada, Europe, Asia and Australia. 4. Property and casualty information services. This segment provided information services, principally motor vehicle records and claims histories, to US property and casualty insurers. This segment was sold in August 1997. 5. Life information services. This segment provides information services, principally physician reports and medical histories, to US life insurers. In accordance with the provisions of Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company has adjusted all prior period financial information to reflect these revised classifications. Information about the Company's operations for the past three years is as follows:
Year Ended December 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------- (In Thousands) REVENUES FROM EXTERNAL CUSTOMERS Enterprise software and services Property and casualty . . . . . . . . . . . . . . $250,086 $ 216,093 $ 193,470 Life and financial solutions. . . . . . . . . . . 102,593 67,276 54,096 Life information services . . . . . . . . . . . . . 64,610 64,920 60,128 --------- ----------- ----------- Total US revenues . . . . . . . . . . . . . . . 417,289 348,289 307,694 International . . . . . . . . . . . . . . . . . . . 165,493 139,941 117,919 --------- ----------- ----------- Total revenues from continuing operations . $582,782 $ 488,230 $ 425,613 ========= =========== =========== Discontinued Operations Property and casualty information services. . . . 64,649 93,679 111,689 INCOME (EXPENSE) FROM CONTINUING OPERATIONS Enterprise software and services Property and casualty . . . . . . . . . . . . . . $ 71,295 $ 65,046 $ 55,597 Life and financial solutions. . . . . . . . . . . 21,647 14,970 17,556** Life information services . . . . . . . . . . . . . 3,371 3,321 3,174 Corporate . . . . . . . . . . . . . . . . . . . . . (26,624) (19,638)* (81,187)* --------- ----------- ----------- Total US operating income . . . . . . . . . . . 69,689 63,699 (4,860) International . . . . . . . . . . . . . . . . . . . 12,462 9,458 24,414 --------- ----------- ----------- Income from continuing operations before income taxes. . . . . . . . . . . . 82,151 73,157 19,554 --------- ----------- ----------- Equity in earnings of unconsolidated affiliates . . . 1,189 - - Other income and expenses . . . . . . . . . . . . . . (3,583) (2,677) (543) Income taxes. . . . . . . . . . . . . . . . . . . . . 29,833 25,462 9,058 --------- ----------- ----------- Income from continuing operations. . . . . . . . $ 49,924 $ 45,018 $ 9,953 ========= =========== =========== DISCONTINUED OPERATIONS Property and casualty information services. . . . . $ 533 $ 1,568* $ (10,930)* Income taxes (benefit). . . . . . . . . . . . . . . 200 589 (4,116) --------- ----------- ----------- Discontinued operations, net. . . . . . . . . . $ 333 $ 979 $ (6,814) ========= =========== =========== DEPRECIATION AND AMORTIZATION Enterprise software and services Property and casualty . . . . . . . . . . . . . . $ 40,828 $ 36,245 $ 42,488 Life and financial solutions. . . . . . . . . . . 12,590 10,429 7,677 Life information services . . . . . . . . . . . . . 1,828 1,392 1,100 Corporate . . . . . . . . . . . . . . . . . . . . . 278 172 261 International . . . . . . . . . . . . . . . . . . . 16,342 13,788 8,882 Transferred to selling, general and administrative. (3,153) (3,261) (2,046) --------- ----------- ----------- Total depreciation and amortization . . . . . . $ 68,713 $ 58,765 $ 58,362 ========= =========== =========== Discontinued Operations Property and casualty information services. . . . 178 255 293 *Discontinued and Corporate operating income includes special charges and write-offs. **Includes operating income from the health services unit (divested June 1995) of $1.0 million and a pre-tax gain of $8.1 million on the sale of the unit's business related assets.
As of December 31, 1997 1996 1995 - -------------------------------------------------------------------------- (In Thousands) IDENTIFIABLE ASSETS Enterprise software and services Property and casualty. . . . . . . . $394,376 $331,539 $ 409,296 Life and financial solutions . . . . 82,010 90,475 96,491 Information services Property and casualty (discontinued) - 21,129 20,495 Life . . . . . . . . . . . . . . . . 14,957 26,140 23,241 Corporate. . . . . . . . . . . . . . . 8,464 15,168 26,746 --------- --------- ---------- Total US identifiable assets . . . 499,807 484,451 576,269 International. . . . . . . . . . . . . 142,881 123,232 135,949 Eliminations . . . . . . . . . . . . . (24,282) (26,297) (179,482) --------- --------- ---------- Total identifiable assets. . . . . $618,406 $581,386 $ 532,736 ========= ========= ========== LONG-LIVED ASSETS US . . . . . . . . . . . . . . . . . . $361,383 $345,641 $ 303,341 International. . . . . . . . . . . . . 71,214 75,403 63,802 --------- --------- ---------- Total long-lived assets. . . . . . $432,597 $421,044 $ 367,143 ========= ========= ==========
NOTE 13. SIGNIFICANT RISKS AND UNCERTAINTIES The Company's operating results and financial condition may be impacted by a number of factors, including but not limited to the following, any of which could cause actual results to vary materially from current and historical results or the Company's anticipated future results. Currently, the Company's business is focused principally within the global property and casualty and life insurance and financial services industries. Significant changes in the regulatory or market environment of these industries could impact demand for the Company's software products and services. Additionally, there is increasing competition for the Company's products and services, and there can be no assurance that the Company's current products and services will remain competitive, or that the Company's development efforts will produce products with the cost and performance characteristics necessary to remain competitive. Furthermore, the market for the Company's products and services is characterized by rapid changes in technology. The Company's success will depend on the level of market acceptance of the Company's products, technologies and enhancements, and its ability to introduce such products, technologies and enhancements to the market on a timely and cost effective basis, and maintain a labor force sufficiently skilled to compete in the current environment. Contracts with governmental agencies involve a variety of special risks, including the risk of early contract termination by the governmental agency and changes associated with newly elected state administrations or newly appointed regulators. The timing and amount of the Company's revenues are subject to a number of factors, including, but not limited to, the timing of customers' decisions to enter into large license agreements with the Company, which make estimation of operating results prior to the end of a quarter or year extremely uncertain. Additionally, while management believes that the Company's financing needs for the foreseeable future will be satisfied from cash flows from operations and the Company's currently existing credit facility, unforeseen events or adverse economic or business trends may significantly increase cash demands beyond those currently anticipated or affect the Company's ability to generate/raise cash to satisfy financing needs. As discussed in Note 1, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Amounts affected by these estimates include, but are not limited to, the estimated useful lives, related amortization expense and carrying values of the Company's intangible assets and capitalized software development costs and accrued reserves established for contingencies such as litigation and restructuring activities. Changes in the status of certain matters or facts or circumstances underlying these estimates could result in material changes to these estimates, and actual results could differ from these estimates. As a result of the above and other factors, the Company's earnings and financial condition can vary significantly from quarter-to-quarter and year-to-year. These variations may contribute to volatility in the market for the Company's common stock. Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash equivalents, marketable securities and trade receivables. The Company places its cash, cash equivalents and marketable securities with high credit quality entities and limits the amount of credit exposure with any one entity. In addition, the Company performs ongoing evaluations of the relative credit standing of these entities, which are considered in the Company's investment strategy. Concentration of credit risk with respect to trade accounts receivable is generally diversified due to the large number of entities comprising the Company's customer base across the insurance industry. The Company performs ongoing credit evaluations on certain of its customers' financial conditions, but generally does not require collateral to support customer receivables. The Company establishes an allowance for uncollectible accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. POLICY MANAGEMENT SYSTEMS CORPORATION QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (Unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------- (In Thousands, Except Per Share Data) 1997 Revenues. . . . . . . . . . . . . . . . . $131,187 $140,628 $147,659 $163,308 Operating income. . . . . . . . . . . . . 16,307 17,666 21,323 26,855 Other income and expenses, net. . . . . . (790) (1,012) (1,007) (774) Income from continuing operations before income taxes . . . . . . . . . . 15,886 16,975 20,590 26,306 Discontinued operations, net. . . . . . . 171 95 67 - Net income. . . . . . . . . . . . . . . . $ 10,092 $ 10,694 $ 12,937 $ 16,534 Basic earnings per share. . . . . . . . . $ 0.56 $ 0.59 $ 0.71 $ 0.90 Diluted earnings per share. . . . . . . . $ 0.55 $ 0.58 $ 0.68 $ 0.85 1996 Revenues. . . . . . . . . . . . . . . . . $109,937 $114,007 $123,069 $141,217 Operating income. . . . . . . . . . . . . 17,967 24,735 14,651 15,804 Other income and expenses, net. . . . . . (115) (432) (1,099) (1,031) Income from continuing operations before income taxes . . . . . . . . . . 17,852 24,303 13,552 14,773 Discontinued operations, net. . . . . . . 74 206 403 296 Net income. . . . . . . . . . . . . . . . $ 11,628 $ 15,803 $ 9,007 $ 9,559 Basic earnings per share. . . . . . . . . $ 0.60 $ 0.85 $ 0.50 $ 0.53 Diluted earnings per share. . . . . . . . $ 0.59 $ 0.83 $ 0.49 $ 0.52 1995 Revenues. . . . . . . . . . . . . . . . . $101,424 $104,393 $104,459 $115,337 Operating income (loss) . . . . . . . . . 19,904 18,383 18,370 (37,103) Other income and (expenses), net. . . . . (268) (292) (4) 21 Income (loss) from continuing operations before income taxes (benefit) . . . . . 19,636 18,091 18,366 (37,082) Discontinued operations, net. . . . . . . (945) (854) (781) (4,234) Net income (loss) . . . . . . . . . . . . $ 11,320 $ 12,090 $ 11,594 $(31,865) Basic earnings (loss) per share . . . . . $ 0.58 $ 0.62 $ 0.60 $ (1.64) Diluted earnings (loss) per share . . . . $ 0.58 $ 0.61 $ 0.58 $ (1.64) The results of operations in 1996 reflect a litigation related pre-tax charge recorded in the fourth quarter of $6.0 million. Additionally, the Company recorded a litigation related pre-tax gain of $9.4 million in the third quarter. The results of operations in 1995 reflect special charges recorded in the fourth quarter of $58.6 million (after taxes $42.9 million, or $2.21 per share). Additionally, the Company recorded credits of $1.7 million (after taxes $1.0 million, or $.05 per share) and charges of $7.9 million (after taxes $4.9 million or $0.25 per share), in the first and second quarters, respectively. On June 30, 1995, the Company sold its health services unit and recorded a pre-tax gain of $8.1 million (after taxes $6.7 million, or $0.35 per share). For a further discussion of these special charges/credits see Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 11 of Notes to Consolidated Financial Statements.
SCHEDULE II POLICY MANAGEMENT SYSTEMS CORPORATION VALUATION AND QUALIFYING ACCOUNTS
Additions ---------------- Balance Charged at Charged to Balance Beginning to Other at End Description of Period Expenses Accounts Deductions of Period - -------------------------------------------------------------------------------------------------- (In Thousands) Allowance for uncollectible amounts Year ended December 31, 1997. . . . . . . . . . . $ 883 3,750 - (2,005)(1) $ 2,628 Allowance for uncollectible amounts Year ended December 31, 1996. . . . . . . . . . . $ 2,042 687 - (1,846)(1) $ 883 Allowance for uncollectible amounts Year ended December 31, 1995. . . . . . . . . . . $ 1,024 1,201 - (183)(1) $ 2,042 Accrued restructuring and lease termination costs Year ended December 31, 1997. . . . . . . . . . . $ 3,818 109(2) - (2,416)(3) $ 1,511 Accrued restructuring and lease termination costs Year ended December 31, 1996. . . . . . . . . . . $13,895 434(2) - (10,511)(3) $ 3,818 Accrued restructuring and lease termination costs Year ended December 31, 1995. . . . . . . . . . . $16,444 3,850(2) - (6,399)(3) $13,895 Allowance for deferred tax assets Year ended December 31, 1997. . . . . . . . . . . $ 2,804 - (204) - $ 2,600 Allowance for deferred tax assets Year ended December 31, 1996. . . . . . . . . . . $ 3,090 - (286) - $ 2,804 Allowance for deferred tax assets Year ended December 31, 1995. . . . . . . . . . . $ - - 3,090 - $ 3,090 Notes: (1) Write-off of amounts uncollectible. (2) Principally relates to amounts estimated for employee severance and outplacement and to ongoing lease obligations and/or terminations for the planned future abandonment of certain leased office facilities, including credit amounts for changes in these estimates. (3) Principally cash payments related to lease terminations and employee severance and outplacement costs.
REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS POLICY MANAGEMENT SYSTEMS CORPORATION Our report on the consolidated financial statements of Policy Management Systems Corporation is included on page 26 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 25 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. Coopers & Lybrand L.L.P. Atlanta, Georgia February 10, 1998 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information other than the listing of Executive Officers of the Company, which is set forth in Part I of this Form 10-K, is contained under the heading "Election of Directors" in the Company's 1998 Proxy Statement and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The section of the Company's 1998 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 1998 Proxy Statement titled "Principal Stockholders" and "Stock Ownership of Directors, Director Nominees and Executive Officers" are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The sections of the Company's 1998 Proxy Statement titled "Certain Transactions" and "Compensation Committee Interlocks and Insider Participation" are incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS AND SCHEDULES See Index to Consolidated Financial Statements and Supplementary Data on page 25. 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, 1997 is incorporated herein by reference. FORM 8-K The Company did not file any reports on Form 8-K during the last quarter of the year ended December 31, 1997. 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 DATE March 18, 1998 Timothy V. Williams, Executive Vice President and Chief Financial Officer BY (SIGNATURE) /s/ Jacques E. McCormack DATE March 18, 1998 Jacques E. McCormack, Vice President, Corporate Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. BY (SIGNATURE) /s/ G. Larry Wilson (NAME AND TITLE) G. Larry Wilson, Chairman of the Board of Directors, DATE March 18, 1998 President and Chief Executive Officer BY (SIGNATURE) /s/ Alfred R. Berkeley, III (NAME AND TITLE) Alfred R. Berkeley, III, Director DATE March 18, 1998 BY (SIGNATURE) /s/ Donald W. Feddersen (NAME AND TITLE) Donald W. Feddersen, Director DATE March 18, 1998 BY (SIGNATURE) /s/ Dr. John M. Palms (NAME AND TITLE) Dr. John M. Palms, Director DATE March 18, 1998 BY (SIGNATURE) /s/ Joseph D. Sargent (NAME AND TITLE) Joseph D. Sargent, Director DATE March 18, 1998 BY (SIGNATURE) /s/ John P. Seibels (NAME AND TITLE) John P. Seibels, Director DATE March 18, 1998 BY (SIGNATURE) /s/ Richard G. Trub (NAME AND TITLE) Richard G. Trub, Director DATE March 18, 1998 POLICY MANAGEMENT SYSTEMS CORPORATION EXHIBIT INDEX Exhibit Number 3. ARTICLES OF INCORPORATION AND BY-LAWS A. Bylaws of the Company, as amended through July 19, 1994, incorporating all amendments thereto subsequent to December 31, 1993 (filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is incorporated herein by reference) B. Articles of Incorporation of the Company, as amended through October 13, 1994, incorporating all amendments thereto subsequent to December 31, 1993 (filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is incorporated herein by reference) 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES A. Specimen forms of certificates for Common Stock of the Company (filed as an Exhibit to Registration Statement No. 2-74821, dated December 16, 1981, and is incorporated herein by reference) B. Articles of Incorporation of the Company, as amended through October 13, 1994, incorporating all amendments thereto subsequent to December 31, 1993 (filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is incorporated herein by reference) 10. MATERIAL CONTRACTS A. Policy Management Systems Corporation 1986 Stock Option Plan (filed as an Exhibit to Form 10-K for the year ended December 31, 1986, and is incorporated herein by reference) B. Conformed copy of Development and Marketing Agreement between International Business Machines Corporation and Policy Management Systems Corporation, dated July 26, 1989 (File No. 0-10175 - filed under cover of Form SE filed on September 29, 1989, and is incorporated herein by reference) C. Policy Management Systems Corporation 1989 Stock Option Plan (File No. 0-10175 - filed under cover of Form SE on March 22, 1991, and is incorporated herein by reference) D. Deferred Compensation Agreement with G. Larry Wilson (filed as an Exhibit to Form 10-K for the year ended December 31, 1993, and is incorporated herein by reference) E. Employment Agreement with Stephen G. Morrison (filed as an Exhibit to Form 10-Q for the quarter ended March 31, 1994, and is incorporated herein by reference) F. Stock Option/Non-Compete Agreement with Stephen G. Morrison (filed as an Exhibit to Form 10-Q for the quarter ended March 31, 1994, and is incorporated herein by reference) G. Shareholders' Agreement, dated April 26, 1994, among Policy Management Systems Corporation, General Atlantic Partners 14, L.P. and GAP Coinvestment Partners (filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1994, and is incorporated herein by reference) H. Registration Rights Agreement, dated April 26, 1994, among Policy Management Systems Corporation, General Atlantic Partners 14, L.P. and GAP Coinvestment Partners (filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1994, and is incorporated herein by reference) I. Employment Agreement with Timothy V. Williams (filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is incorporated herein by reference) J. Stock Option/Non-Compete Form Agreement for named executive officers together with a schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1992, and is incorporated herein by reference) K. Stock Option/Non-Compete Form Agreement for named executive officers together with a schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1994, and is incorporated herein by reference) L. Stock Option Non-Compete Form Agreement for named executive officers together with a schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is incorporated herein by reference) M. Policy Management Systems Corporation 1993 Long-Term Incentive Plan for Executives (filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is incorporated herein by reference) N. First Amendment to the Policy Management Systems Corporation 1989 Stock Option Plan (filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is incorporated herein by reference) O. Fourth Amendment to the Policy Management Systems Corporation 1989 Stock Option Plan (filed as an Exhibit to Form 10-Q for the quarter ending March 31, 1995, and is incorporated herein by reference) P. Second and Third Amendments to the Policy Management Systems Corporation 1989 Stock Option Plan (filed as Exhibits to Form 10-Q for the quarter ended June 30, 1995, and is incorporated herein by reference) Q. Stock Option/Non-Compete Form Agreement for named executive officers together with a schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1995, and is incorporated herein by reference) R. Stock Option/Non-Compete Form Agreement for named executive officers together with a schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-K for year ended December 31, 1995, and is incorporated herein by reference) S. Stock Option/Non-Compete Form Agreement for named executive officers together with a schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-K for year ended December 31, 1995, and is incorporated herein by reference) T. Stock Option/Non-Compete Agreement Amendment No. 1 dated November 8, 1995, to Stock Option/Non-Compete Agreement dated July 20, 1995, with Paul R. Butare (filed as an Exhibit to Form 10-K for year ended December 31, 1995, and is incorporated herein by reference) U. Stock Option/Non-Compete Agreement with Timothy V. Williams dated February 1, 1994 (filed as an Exhibit to Form 10-K for year ended December 31, 1995, and is incorporated herein by reference) V. Stock Option/Non-Compete Agreement with Timothy V. Williams dated May 10, 1995 (filed as an Exhibit to Form 10-K for year ended December 31, 1995, and is incorporated herein by reference) W. Registration Rights Agreement, dated March 8, 1996, between Policy Management Systems Corporation and Continental Casualty Company (filed as an Exhibit to Form 10-Q for the quarter ended March 31, 1996, and is incorporated herein by reference) X. Shareholders Agreement dated March 8, 1996, between Policy Management Systems Corporation and Continental Casualty Company (filed as an Exhibit to Form 10-Q for the quarter ended March 31, 1996, and is incorporated herein by reference) Y. Stock Option/Non-Compete Form Agreement for named executive officers together with a schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1996, and is incorporated herein by reference) Z. Employment Agreement Form dated November 7, 1996, for Messrs. Butare, Morrison and Williams together with a schedule identifying particulars for each executive officer (filed as an Exhibit to Form 10-K for year ended December 31, 1996, and is incorporated herein by reference) AA. Stock Option/Non-Compete Agreement with Stephen G. Morrison dated October 22, 1996 (filed as an Exhibit to Form 10-K for year ended December 31, 1996, and is incorporated herein by reference) BB. Stock Option/Non-Compete Form Agreement dated January 8, 1997 for named executive officers together with a schedule identifying particulars for each executive officer (filed as an Exhibit to Form 10-Q for the quarter ended March 31, 1997, and is incorporated herein by reference) CC. Annual Bonus Program for Executive Officers (filed as an Exhibit to Form 10-Q for the quarter ended March 31, 1997, and is incorporated herein by reference) DD. Form of Amendment No. 1 to the Employment Agreements with Messrs. Butare, Morrison and Williams, together with a schedule identifying particulars for each executive officer (filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1997, and is incorporated herein by reference) EE. Form of Employment Agreements with Messrs. Wilson, Bailey and Coggiola together with schedule identifying particulars for each executive officer (filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1997, and is incorporated herein by reference) FF. Credit Agreement dated as of August 8, 1997, among Policy Management Systems Corporation, the Guarantors Party hereto, Bank of America National Trust and Savings Association and the Other Financial Institution Party Hereto (filed as an exhibit to Form 10-Q for the quarter ended September 30, 1997, and is incorporated herein by reference) GG. Employment Agreement dated January 1, 1998, and Addendum No. 1 thereto dated January 26, 1998, with Donald A. Coggiola (filed herewith) 21. SUBSIDIARIES OF THE REGISTRANT A. Filed herewith 23. CONSENTS OF EXPERTS AND COUNSEL A. Consent of Coopers & Lybrand filed herewith 27. FINANCIAL DATA SCHEDULES A. 1997 filed herewith (EDGAR version only) B. 1996 and 1995, as restated, filed herewith (EDGAR version only) C. First Quarter 1997 and 1996, as restated, filed herewith (EDGAR version only) D. Six Months Ended 1997 and 1996, as restated, filed herewith (EDGAR version only) E. Nine Months Ended 1997 and 1996, as restated, filed herewith (EDGAR version only) EX-10 2 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of January 1, 1998, by and between Policy Management Systems Corporation, a South Carolina corporation ("Employer"), and DONALD A. COGGIOLA ("Employee"). WHEREAS, Employer and Employee wish to alter their current employment arrangement; and WHEREAS, Employer and Employee are desirous of continuing Employee's employment with Employer for the period of five years beginning January 1, 1998, and on the terms and conditions, set forth herein. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and obligations herein contained, the parties hereby agree as follows: 1. EMPLOYMENT. Employer hereby employs Employee, and Employee accepts ---------- such employment, according to the terms and conditions set forth in this Agreement. 2. TERM. ---- (a) The term of Employee's employment hereunder shall be for a period commencing on January 1, 1998, and continuing through December 31, 2002. Notwithstanding the foregoing, Employee's employment by Employer hereunder may be earlier terminated, subject to Section 10 hereof. The period of time between the commencement and termination of Employee's employment hereunder shall be referred to herein as the "Employment Period." (b) In the event of a "Change in Control" on or before June 30, 1998, as defined in Section 10 of this Agreement, the five year term shall be extended for an additional 12-month period. 3. POSITION AND SERVICES. --------------------- (a) Employee shall hold the position of Special Consultant to the CEO of Employer and will report to the CEO. Employee shall have the following duties and responsibilities: (i) sales and marketing consulting; (ii) consulting on improvements in customer satisfaction; (iii) consulting on pricing of products and services; (iv) to keep his knowledge and education current in the fields of insurance and insurance related technologies; and (v) such other duties and responsibilities as are mutually agreed to by Employee and the CEO of Employer. Such duties are expected to include special assignments of significance to Employer and Employee shall have no sales quotas. (b) Employee shall spend 1,000 hours per annum in the employment of Employer and report quarterly to the General Counsel the hours expected within 15 days after the end of each calendar quarter. Notwithstanding the foregoing, Employee shall have the right to enter into such consulting or other working relationships as he may choose. Employee agrees to notify the General Counsel of any such consulting or working arrangement within a reasonable time prior to entering such an arrangement. Employee will not offer consulting or other services to PMSC's customers or prospects which are offered by Employer nor will Employee offer consulting or other services which enhance the position of a competitor vis-a-vis Employer. 4. BASE SALARY. ----------- (a) Employer shall pay to Employee an initial base salary at an annual rate of $370,000, subject to applicable income and employment tax withholdings and all other required and authorized payroll deductions and withholdings. Employee's salary shall be payable in accordance with Employer's payroll practices. Employee's annual base salary will not be adjusted during the Employment Period. (b) In the event of a "Change in Control" on or before June 30, 1998, as defined in Section 10 of this Agreement, Employee's base salary, as in effect immediately prior to such Change in Control, shall be increased to 150% of such base salary. 5. INDEMNIFICATION. During the Term and thereafter, Employer shall --------------- indemnify and hold harmless Employee to the fullest extent permitted by applicable law and the Articles of the Incorporation and By-laws of Employer from and against losses, claims, damages, costs, expenses, liabilities or judgments or amounts paid in settlement with the approval of Employer of or in consideration with any claim, action, suit proceeding or investigation based in whole or in part on the fact that Employee is or was an officer or employee of Employer. Any subsequent changes to the Employer's Articles of Incorporation or By-Laws reducing the indemnity rights granted to Employer's officers shall not affect the rights granted hereunder. 6. MUTUAL RELEASES. Upon the execution of this Agreement and as ---------------- consideration for their mutual obligations hereunder, Employee and Employer -- each agree to execute and honor the terms of a waiver and release of all preexisting claims against one another in the forms set forth in Exhibit A (Employee) and Exhibit B (Employer) hereto, which are incorporated herein by reference. 7. ARBITRATION. Except as to actions for injunctive relief as provided in ----------- Section 15 hereof, any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted, as provided below, before a single arbitrator or three arbitrators, in the State of South Carolina, in accordance with the rules of the American Arbitration Association then in effect. It is hereby expressly agreed that the arbitrator or arbitrators in any proceeding conducted hereunder shall not have the authority to award punitive damages to either party hereto. Except as may be required to enter judgment on the award as provided below, the proceedings and award of any such arbitration shall at all times be kept confidential by the parties hereto, and the parties shall require the arbitrator or arbitrators to maintain the same confidentiality. Judgment may be entered on the arbitration award in any court having jurisdiction. All expenses of any arbitration proceeding hereunder shall be borne by the party who, as determined by the arbitrator or arbitrators, is not the prevailing party in the arbitration, including, without limitation, the reasonable attorneys' fees and expenses of the prevailing party. In any arbitration under this Agreement, a party requesting arbitration shall notify the other party in writing of the existence of the dispute setting forth all issues to be resolved. The parties shall first attempt to agree upon a mutually agreeable arbitrator to decide the dispute. If the parties are unable to mutually agree upon a single arbitrator within 30 days of the notice of dispute, then within 45 days of the notice of dispute each party shall notify the other of the name, address and telephone number of their selected arbitrator. The two arbitrators so selected shall then select a third independent arbitrator within 75 days from the notice of dispute and the dispute will be determined by the three arbitrators so selected. The vote of two of the three arbitrators shall be required in support of any decision or award by the three arbitrator panel. 8. EMPLOYEE BENEFITS AND PERQUISITES. --------------------------------- (a) During the period of employment, Employee shall be entitled to receive the same standard employment benefits as other employees of Employer receive from time to time. Employee shall be entitled to fully participate in all of Employer's future employee benefit programs for employees generally, in accordance with their then-existing terms. Nothing herein shall be interpreted as limiting Employer's right to amend or terminate any employee benefit plan or program at any time in any manner as applied to employees of Employer generally. Employee shall receive, at their current asset book value as of January 1, 1998, title to the office furniture and equipment in use by Employee on the effective date of this Agreement and a $45,000 credit toward an automobile of Employee's choice. (b) In order to stay abreast of trends in the insurance and technology industries, Employee may attend up to four trade shows, conferences or seminars per year and at least one may be outside the continental United States. Attendance shall be at Employer's expense and subject to Employer's policy and procedures governing expense reimbursement. (c) Employee's life insurance benefit will be maintained at the current level and will not be reduced during the term of this Agreement. (d) Employee's vested benefits will not be changed unless they are enhanced during the term of this Agreement. In the event of such enhancement, Employee shall be entitled to the enhanced benefit. 9. WORKING FACILITIES. Employee shall be entitled to perform his duties ------------------ from facilities outside of Employer's facilities, including his residence. When working at Employer's facilities, Employee shall be furnished an office, clerical support, and other facilities and services at the level provided to Vice Presidents of the Employer for the performance of his duties as needed. Employee shall also be provided with access to the Employer's computer network and e-mail services and an Employee telephone credit card for use in performing services for the Employer. 10. TERMINATION. This Agreement does not grant Employee any right or ----------- entitlement to be retained by Employer, and shall not affect or prejudice Employer's right to discharge Employee for the specific reasons set forth below. (a) TERMINATION BY EMPLOYER FOR CAUSE. In the event of termination of --------------------------------- Employee's employment hereunder by Employer "For Cause," Employee shall not be entitled to any severance pay, except as otherwise provided in any applicable benefits plans of Employer that cover Employee. A termination of Employee's employment hereunder by Employer shall be deemed to have occurred "For Cause" if, within a reasonable period after such termination, a good faith finding shall be made by a majority of the Board that such termination occurred as a result of any of the following: (A) any act committed by Employee which shall represent a breach in any material respect of any of the terms of this Agreement and which breach is not cured within 30 days of receipt by Employee of written notice from Employer of such breach; (B) improper conduct consisting of sexual harassment or act of moral turpitude; (C) use of illegal drugs or unauthorized use of alcohol in the workplace or being under the influence of illegal drugs or alcohol while at work; or (D) any conviction of, or plea of nolo contendere to, a crime (other than a traffic violation) that constitutes a felony under the laws of the United States or any political subdivision thereof. Employer shall provide written notice to Employee, within a reasonable time period, that the Board is convening for purposes of determining whether Employee's termination of employment was For Cause and Employee (or his representative) shall have the right to appear before the Board in connection with such determination. If Employer intends to terminate this Agreement under either (B) or (C) above, Employer shall first provide written notice to Employee and if the Employee disputes the factual basis for Employer's right to so terminate, then the dispute shall be submitted to arbitration under Section 7 and any termination shall be delayed until the arbitration decision or award is entered. (b) TERMINATION BY EMPLOYEE FOR GOOD REASON BEFORE OR AFTER A CHANGE IN ------------------------------------------------------------------- CONTROL WHICH OCCURS PRIOR TO JUNE 30, 1998. In the event of termination of ----------------------------------------- Employee's employment hereunder by Employee prior to the end of the five year term "For Good Reason": (i) In the event of a "Change in Control", Employee shall be entitled to severance payments in the form of continuation of Employee's $370,000 base salary times 150%, as in effect immediately prior to such termination, for the remainder of the five year term; and (ii) if such termination is after a Change in Control which occurs prior to June 30, 1998, for the remainder of the five year term Employee shall also receive an annual payment equal to 150% of the highest annual bonus earned by Employee with respect to his performance during the calendar years 1996 or 1997. Such payment shall be made in equal monthly installments commencing the first day of the first month following such termination. The employment of Employee hereunder shall be deemed to have been terminated "For Good Reason" upon termination of employment by Employee following a "constructive termination event," subject to the provisions of this subsection (b). For purposes hereof, the following shall constitute constructive termination events if such events occur prior to or after a "Change in Control" (as hereinafter defined): a material breach by Employer of any of its obligations to provide Employee with the compensation and benefits provided in Sections 4, 8 and 9 hereof. For purposes hereof, the following shall constitute constructive termination events if such events occur upon or after a "Change in Control": (1) any reduction of Employee's salary; (2) a material reduction from pre-Change in Control levels in Employee's employee benefits and perquisites, unless Employer provides a substitute benefit that is at least as favorable on an after-tax basis; and (3) a relocation of Employee's office by more than 35 miles that increases Employee's travel distance from home. An event described above as a constructive termination event shall be treated as a constructive termination event hereunder following the expiration of 30 days from the date Employee has notified Employer of the occurrence of such event and his intention to treat such event as a constructive termination event and terminate his employment on the basis thereof, provided that Employer has not cured the constructive termination event before the expiration of such 30 day period. Any notice given by Employee under this paragraph shall be effective only if given to Employer in writing within 45 days after the event in question. A "Change in Control" shall be deemed to have taken place upon the occurrence of one of the following events: (1) any "person" (as such term is defined in Section 3 (a) (9) of the Exchange Act and as used in Sections 13 (d) (3) and 14 (d) (2) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 33 a% or more of the combined voting power of the Company's then outstanding securities eligible to vote for the election of the Board (the "Company Voting Securities"); provided, however, that the event described in this paragraph shall not be deemed to be a Change in Control by virtue of any of the following situations: (i) an acquisition by the Company or any of its subsidiaries; (ii) an acquisition by any employee benefit plan or employee stock plan sponsored or maintained by the Company or any of its subsidiaries or any trustee or fiduciary with respect to such plan; or (iii) an acquisition by any underwriter temporarily holding Company Voting Securities pursuant to an offering of such securities; (2) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority thereof; provided, however, that any person becoming a director subsequent to the date hereof, whose election, or nomination for election, by the Company's shareholders was approved by a vote of at least two-thirds of the directors comprising the Incumbent Board who are then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this paragraph (2), considered as though such person were a member of the Incumbent Board, but excluding for this purpose any individual elected or nominated as a director of the Company as a result of any actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board; (3) the consummation of a merger, consolidation, share exchange or similar form of corporate reorganization of the Company or any of its subsidiaries that requires the approval of the Company's shareholders, whether for such transaction or the issuance of securities in connection with the transaction or otherwise (a "Business Combination"), unless (i) immediately following such Business Combination: (A) more than 50% of the total voting power of the corporation resulting from such Business Combination (the "Surviving Corporation") or, if applicable, the ultimate parent corporation which directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by Company Voting Securities that were outstanding immediately prior to the Business Combination (or, if applicable, shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan or employee stock plan sponsored or maintained by the Surviving Corporation or Parent Corporation or any trustee or fiduciary with respect to any such plan) is or becomes the beneficial owner, directly or indirectly, of 33 a% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation), and (C) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation), following the Business Combination, were members of the Incumbent Board at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination or (ii) the Business Combination is effected by means of the acquisition of Company Voting Securities from the Company, and prior to such acquisition a majority of the Incumbent Board approves a resolution providing expressly that such Business Combination does not constitute a Change in Control under this paragraph (3); or (4) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or the sale or other disposition of all or substantially all of the assets of the Company and its subsidiaries, other than a sale or disposition of assets to a subsidiary of the Company. If on or before June 30, 1998, the Company has received any offers or inquiries or if the Company has commenced negotiations with a third party on a transaction which results in a Change of Control transaction occurring, then such Change in Control transaction shall be deemed to have occurred prior to June 30, 1998, for the purposes of Section 4(b) and Section 10, provided, however, that any increases in compensation or change in the meaning of "For Good Reason" shall not become effective until the closing date of such transaction. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any person acquires beneficial ownership of more than 33a% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which, by reducing the number of Company Voting Securities outstanding, increases the percentage of shares beneficially owned by such person; provided, that if a Change in Control would occur as a result of such an acquisition by the Company (if not for the operation of this sentence), and after the Company's acquisition such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control shall then occur. For purposes of this Section 10 only, the term "subsidiary" means a corporation of which the Company owns directly or indirectly 50% or more of the voting power. (c) TERMINATION AT END OF FIVE YEARS. Upon the expiration of this -------------------------------- Agreement on December 31, 2002 unless extended by a Change of Control event, Employee shall not be entitled to any severance pay. (d) OTHER TERMINATIONS. In the event of termination of Employee's ------------------ employment by Employee absent a breach of this Agreement, Employee shall not be entitled to any severance pay, except as otherwise provided in any applicable benefit plans of Employer that cover Employee. (e) CONDITIONS TO SEVERANCE BENEFIT. ------------------------------- (i) As conditions of Employee's continued entitlement to the severance payments provided by this Section 10, Employee is required to honor in accordance with their terms the provisions of Section 11, 12, 13 and 14 hereof. In the event that Employee fails to abide by the foregoing, all payments to which Employee may otherwise have been entitled under this Section 10 shall immediately terminate and be forfeited, and any portion of the base salary continuation payments that may have been paid to Employee shall forthwith be returned to Employer. The parties hereto agree that Employee is under no affirmative obligation to seek to mitigate or offset the severance payments provided by this Section 10. (ii) For purposes only of this Section, Employee shall be treated as having failed to honor the provisions of Sections 11, 12, 13 and 14 hereof only upon the vote of a majority of the Board following notice of the alleged failure by Employer to Employee, an opportunity for Employee to cure the alleged failure within a period of 30 days from the date of such notice and an opportunity for Employee to be heard on the issue by the Board. (f) POTENTIAL EXCISE TAXES. Should any payments made or benefits provided ---------------------- to Employee under this Agreement be subject to an excise tax pursuant to Section 4999 of the Internal Revenue Code or any successor or similar provision thereto, or comparable state or local tax laws, Employer shall pay to Employee such additional compensation as is necessary (after taking into account all federal, state, and local income taxes payable by Employee as a result of the receipt of such compensation) to place Employee in the same after-tax position he would have been in, had no such excise tax (or any interest or penalties thereon) been paid or incurred. Employer shall pay such additional compensation upon the earlier of: (i) the time at which Employer withholds such excise tax from any payments to Employee; or (ii) 30 days after Employee notifies Employer that Employee has filed a tax return which takes the position that such excise tax is due and payable in reliance on a written opinion of Employee's tax advisor that it is more likely than not that such excise tax is due and payable. If Employee makes any additional payment with respect to any such excise tax as a result of an adjustment to Employee's tax liability by any federal, state, or local authority, Employer shall pay such additional compensation within 30 days after Employee notifies Employer of such payment. 11. CONFIDENTIALITY. Employee agrees that he will not at any time during --------------- the term hereof or thereafter for any reason, in any fashion, form, or manner, either directly or indirectly, divulge, disclose, or communicate to any person, firm, corporation, or other business entity, in any manner whatsoever, any confidential information or trade secrets concerning the business of Employer (including the business of any unit thereof), which materially effects Employer including, without limiting the generality of the foregoing, the confidential information described in Exhibit C, which is attached hereto and incorporated herein by reference. Employee hereby acknowledges and agrees that the prohibition against disclosure of confidential information recited herein is in addition to, and not in lieu of, any rights or remedies which Employer may have available pursuant to the laws of any jurisdiction or at common law to prevent the disclosure of confidential information or trade secrets, and the enforcement by Employer of its rights and remedies pursuant to this Agreement shall not be construed as a waiver of any other rights or available remedies which it may possess in law or equity absent this Agreement. The foregoing shall not prohibit the disclosure of information to the extent such disclosure is required by law or judicial or governmental process, provided however, that the party intending to disclose information under this provision shall notify the other party of the intent to disclose a reasonable time prior to such disclosure. 12. PROPERTY OF EMPLOYER. Employee acknowledges that from time to time in -------------------- the course of providing services pursuant to this Agreement he shall have the opportunity to inspect and use certain property, both tangible and intangible, of Employer, and Employee hereby agrees that said property shall remain the exclusive property of Employer, and Employee shall have no right or proprietary interest in such property, whether tangible or intangible, including, without limitation, Employer's customer and supplier lists, contract forms, books of account, computer programs, and similar property. 13. NON-COMPETITION. Employee agrees that he shall not, during the --------------- Employment Period and for a period of two (2) years after the termination or end thereof, directly or indirectly compete with Employer by engaging in the activities set forth in Exhibit D, which is attached hereto and incorporated herein by reference (the "Prohibited Activities"), within the geographic area which is set forth on Exhibit E, which is attached hereto and incorporated herein by reference (the "Restricted Area"). For purposes of this Section 13, Employee recognizes and agrees that Employer conducts and will conduct business in the entire Restricted Area and that Employee will perform his duties for Employer within the entire Restricted Area. Employee shall be deemed to be engaged in and carrying on said Prohibited Activities if he engages in said activities in any capacity whatsoever, including, but not limited to, by or through a partnership of which he is a general or limited partner or an employee engaged in said activities, or by or through a corporation or association of which he owns five percent (5%) or more of the stock or of which he is an officer, director, employee, member, representative, joint venturer, independent contractor, consultant, or agent who is engaged in said activities. Employee agrees that during the two (2) year period described above, he will notify Employer of the name and address of each Employer with whom he has accepted employment during said period and provide a description of his position and duties. Such notification shall be made in writing within 30 days after Employee accepts any such employment. 14. NON-SOLICITATION OF EMPLOYEES. Employee agrees that he shall not, ----------------------------- during the Employment Period and for a period of two years after the termination thereof, for any reason, directly or indirectly induce or attempt to induce any employee of Employer to terminate his or her employment. During the Employment Period and for a period of two years after the termination thereof for any reason, Employee also will not, without prior written consent of Employer, offer employment either on behalf of himself or on behalf of any other individual or entity (i) to any employee of Employer, or (ii) to any former employee of Employer during the first six months after the former employee's termination of employment. 15. BREACH OF RESTRICTIVE COVENANTS. The parties agree that a breach or ------------------------------- violation of Sections 11, 12, 13 and 14 hereof will result in immediate and irreparable injury and harm to Employer, who shall have, in addition to any and all remedies of law and other consequences under this Agreement, the right to an injunction, specific performance or other equitable relief to prevent the violation of the obligations hereunder. 16. STOCK OPTIONS. ------------- (i) Employee's change of position or status pursuant to this Agreement does not constitute a demotion as defined in paragraph 7.4 of Employer's Long Term Incentive Plan. All vested stock options must be exercised by Employee during the period of employment or within 90 days thereafter or will be forfeited in accordance with the terms of Employer's stock option plans. (ii) Notwithstanding the provisions of Section 18 of this Agreement, the provisions in Section 3C Additional Compensation of any Stock ----------------------- Option/Non-Compete Agreement between the Employer and Employee which pre-date this Agreement are deleted in their entirety and are superseded in full by this Agreement. (iii) Notwithstanding the provisions of Section 18 of this Agreement, the provisions in any stock option agreement between Employer and Employee shall continue to govern the rights of Employee with respect to those stock options in the event of a "Change in Control" as that term is defined in the relevant stock option agreement and this Agreement shall have no force or effect with respect to such stock options. (iv) Notwithstanding the provisions of Section 18 of this Agreement, the Employee Stock Option/Non-Compete Agreements between Employer and Employee dated on or after May 12, 1994, are amended to delete the provision in paragraph 1 of such agreements which allow such options to be revoked by the Compensation Committee of the Board. (v) If existing stock options are repriced by the Company, Employee shall participate in the repricing. 17. NOTICES. Any notice required to be given pursuant to the provisions ------- of this Agreement shall be in writing and delivered personally or sent by registered or certified mail, return receipt requested, or by a nationally recognized overnight courier service, postage or delivery prepaid, to the party named at the address set forth below, or at such other address as each party may hereafter designate in a written notice to the other party delivered in accordance with the terms of this Section 17: Employer: Policy Management Systems Corporation One PMS Center Blythewood, SC 29016 Attention: General Counsel Employee: Donald A. Coggiola 127 Old Mill Circle Columbia, South Carolina 29205 Any such notices shall be deemed to have been delivered when served personally or, in the case of Notices sent by registered or certified mail or courier, upon signature acknowledging receipt thereof. 18. ENTIRE AGREEMENT. ---------------- (a) CHANGE, MODIFICATION, WAIVER. No change or modification of this ---------------------------- Agreement shall be valid unless it is in writing and signed by each of the parties hereto. No waiver of any provision of this Agreement shall be valid unless it is in writing and signed by the party against whom the waiver is sought to be enforced. The failure of a party to insist upon strict performance of any provision of this Agreement in any one or more instances shall not be construed as a waiver or relinquishment of the right to insist upon strict compliance with such provision in the future. (b) INTEGRATION OF ALL AGREEMENTS. This Agreement constitutes the entire ----------------------------- Agreement between the parties hereto with regard to the subject matter hereof, and there are no agreements, understandings, specific restrictions, warranties, or representations relating to said subject matter between the parties other than those set forth herein or herein provided for. This Agreement supersedes the June 30, 1997 Employment Agreement between Employer and Employee and the June 30, 1997 Agreement is terminated by this Agreement. (c) SEVERABILITY OF PROVISIONS. In the event that any one or more of the -------------------------- provisions of this Agreement or any word, phrase, clause, sentence, or other portion thereof (including without limitation the geographical and temporal restrictions contained herein) shall be deemed to be illegal or unenforceable for any reason, such provision or portion thereof shall be modified or deleted in such a manner so as to make this Agreement as modified legal and enforceable to the fullest extent permitted under applicable laws. 19. ASSIGNMENT. The rights, duties, and obligations under this Agreement ---------- may not be assigned by either party, except that if there is a Change in Control as defined in Section 10, Employer may assign its rights and obligations hereunder to the person, corporation, partnership, or other entity which has gained such control. In addition, this Agreement shall be assignable by Employer to any entity acquiring all or substantially all of the assets of Employer. The provisions of this Agreement shall be binding on any such assignee. 20. GOVERNING LAW. This Agreement shall be governed by and construed in ------------- accordance with the laws of the state of South Carolina. 21. MISCELLANEOUS. ------------- (a) FORM. As employed in this Agreement, the singular form shall include, ---- if appropriate, the plural. (b) HEADINGS. The headings employed in this Agreement are solely for the -------- convenience and reference of the parties and are not intended to be descriptive of the entire contents of any paragraph and shall not limit or otherwise affect any of terms, provisions, or construction thereof. 22. COUNTERPARTS. This Agreement may be executed in two or more ------------ counterparts, each of which shall take effect as an original and all of which - shall evidence one and the same Agreement. IN WITNESS WHEREOF, this Agreement is executed as of the date first above written. EMPLOYER: POLICY MANAGEMENT SYSTEMS CORPORATION BY: /S/ 12-15-97 --------------- STEPHEN G. MORRISON EMPLOYEE: /S/ 12-15-97 --------------- DONALD A. COGGIOLA EXHIBIT A --------- EMPLOYEE RELEASE AND COVENANT ----------------------------- This RELEASE AND COVENANT is executed by Donald A. Coggiola ("Employee") and delivered to Policy Management Systems Corporation ("Employer"). In consideration of the Employment Agreement between Employment Agreement between Employer and Employee dated ______________, 1997, (the "Employment Agreement"), Employee hereby agrees as follows: Section 1. Release and Covenant. Employee, of his own free will, -------------------- voluntarily releases and forever discharges Employer and its subsidiaries and affiliates, and their respective directors, officers, employee, agents, stockholders, successors, and assigns (both individually and in their official capacities) from, and covenants not to sue or proceed against any of the foregoing on the basis of, any and all past or present causes of action, suits, agreements, or other claims which Employee, his dependents, relatives, heirs, executors, administrators, successors, and assigns has or have against Employer, including upon or by reason of any matter arising out of his employment by Employer, and including, but not limited to, any alleged violation of the Civil Rights Acts of 1964 and 1991, the Equal Pay at of 1963, the Age Discrimination in Employment Act of 1967, the Rehabilitation Act of 1973, the Older Workers Benefit Protection Act of 1990, the Americans with Disabilities Act of 1990, and any other federal or state law, regulation, or ordinance, or public policy, contract, or tort law, having any bearing whatsoever on the terms and conditions of employment with Employer. This release shall not, however, constitute a waiver of any of Employee's rights upon termination of employment under the Employment Agreement or under any Stock Option Plan in which Employee received stock options, or under the terms of any employee benefit plan of Employer in which Employee is participating. Section 2. Due Care. Employee acknowledges that he has received a copy -------- of this Release prior to its execution and has been advised hereby of his opportunity to review and consider this Release for 21 days prior to its execution. Employee further acknowledges that he has been advised hereby to consult with an attorney prior to executing this Release. Employee enters into this Release having freely and knowingly elected, after due consideration, to execute this Release and to fulfill the promises set forth herein. This Release shall be revocable by Employee during the 7-day period following its execution, and shall not become effective or enforceable until the expiration of such 7-day period. In the event of such a revocation, Employee shall not be entitled to the consideration for this Release set forth above. Section 3. Reliance by Employee. Employee acknowledges that, in his decision -------------------- to enter into this Release, he has not relied on any representations, promises, or agreements of any kind, including oral statements by representatives of Employer, except as set forth in this Release and the Employment Agreement. This RELEASE AND COVENANT is executed by Employee and delivered to Employer on _____________, 1997. EMPLOYEE: By: EXHIBIT B --------- EMPLOYER RELEASE AND COVENANT ----------------------------- This RELEASE AND COVENANT is executed by Policy Management Systems Corporation ("Employer") and delivered to Donald A. Coggiola ("Employee"). In consideration of the Employment Agreement between Employer and Employee dated _________, 1997, (the "Employment Agreement"), Employer hereby agrees as follows: Employer releases and forever discharges Employee, his dependents, heirs, executors, administrators, successors, and assigns (the "releasees") from, and covenants not to sue or proceed against Employee and his releasees on the basis of, any and all past or present causes of action, suits, arrangements, or other claims which Employer has against Employee upon or by reason of any matter, cause, or thing whatsoever, including, but not limited to, any matters arising out of his employment by Employer. This release shall not, however, constitute a waiver of any of Employer's rights under the Employment Agreement. This RELEASE AND COVENANT is executed by Employer and delivered to Employee on _____________, 1997. EMPLOYER: By: EXHIBIT C CONFIDENTIAL INFORMATION 1. All software/systems (including all present, planned, and future software), whether licensed or unlicensed, developed by or on behalf of, or otherwise acquired by Policy Management Systems Corporation or any of its subsidiaries. "All software/system" shall mean: - - all code in whatever form - - all data pertaining to the architecture and design of such software systems - - all documentation in whatever form - - all flowcharts - - any reproduction or recreation in whole or in part of any of the above in whatever form. 2. All business plans and strategies including: - - strategic plans - - product plans - - marketing plans - - financial plans - - operating plans - - resource plans - - all research and development plans including all data produced by such efforts. 3. Internal policies, procedures, methods, and approaches which are unique to Policy Management Systems Corporation and are non-public. 4. Any information relating to the employment, job responsibility, performance, salary, and compensation of any present or future officer or employee of Policy Management Systems Corporation. EXHIBIT D Acting in any capacity, either individually or with any corporation, partnership, or other entity, directly or indirectly, in providing, or proposing to provide, data processing software systems, related automation support services and information services to the insurance industry, including, but not limited to, application software, processing, consulting, and related services, in the performance of any of the following types of duties in any part of the insurance industry: 1. The performance of the sales and marketing functions. 2. The responsibility for sales revenue generation. 3. The responsibility for customer satisfaction. 4. The responsibility for research and development of insurance database products. 5. The responsibility for the research and development of information data processing systems and services. 6. The providing of input to pricing of products. 7. The planning and management of data processing services resources. 8. The coordination of the efforts of the various aspects of computer systems services organizations with other functions. 9. The planning and management of information services resources. 10. The providing and management of an operations staff to support the above listed activities. EXHIBIT E RESTRICTED AREA Fifty mile radius of the city limits of the following cities: Toronto, Canada Birmingham, Alabama Columbus, Ohio Minneapolis, Minnesota Cincinnati, Ohio San Diego, California Chicago, Illinois Melbourne, Australia Dallas/Fort Worth, Texas Indianapolis, Indiana Los Angeles, California St. Paul, Minnesota Boston, Massachusetts Denver, Colorado Philadelphia, Pennsylvania Mobile, Alabama Hartford, Connecticut Seattle, Washington San Francisco, California Bloomington, Illinois New York City, New York Des Moines, Iowa Columbia, South Carolina San Juan, Puerto Rico Sydney, Australia El Paso, Texas Honolulu, Hawaii Detroit, Michigan Jacksonville, Florida Phoenix, Arizona Milwaukee, Wisconsin San Antonio, Texas Montreal, Canada Baltimore, Maryland EXHIBIT E (CONTD.) Kansas City, Missouri San Jose, California Stanford, Connecticut Memphis, Tennessee Oklahoma City, Oklahoma Washington, D.C. Atlanta, Georgia New Orleans, Louisiana Houston, Texas London, England Miami, Florida Paris, France Princeton, New Jersey St. Louis, Missouri Cleveland, Ohio Nashville, Tennessee ADDENDUM NO. 1 TO THE EMPLOYMENT AGREEMENT This Addendum is entered into on January 26, 1998 to be effective January 1, 1998, and is hereby made a part of and incorporated into the Employment Agreement by and between POLICY MANAGEMENT SYSTEMS CORPORATION ("PMSC") and DONALD A. COGGIOLA ("Employee"), dated January 1, 1998 (the "Agreement"). In the event that any provision of this Addendum and any provision of the Agreement is inconsistent or conflicting, the inconsistent or conflicting provision of this Addendum shall be and constitute an amendment of the Agreement and shall control, but only to the extent that such provision is inconsistent or conflicting with the Agreement. PMSC and Employee hereby agree to amend the above referenced Agreement as follows: 1. The first sentence of Section 4(a) is deleted in its entirety and is replaced with the following: "Employer shall pay to Employee an initial base salary at an annual rate of $387,000 for the calendar years 1998, 1999 and 2000 and at an annual rate of $370,000 thereafter, subject to applicable income and employment tax withholdings and all other required and authorized payroll deductions and withholdings." 2. The last sentence of Section 8(a) is deleted in its entirety. PMSC and Employee certify by their undersigned authorized agents that they have read this Addendum and the Agreement and agree to be bound by their terms and conditions. PMSC EMPLOYEE POLICY MANAGEMENT SYSTEMS CORPORATION DONALD A. COGGIOLA By: /S/ 1/26/98 /S/ 1/26/98 ------------- ------------- (Authorized Signature) (in non-black ink, please) Stephen G. Morrison ------------------- (Name) Executive Vice President and General Counsel ------- (Title) 1/26/98 ------- (Execution Date) EX-21 3 POLICY MANAGEMENT SYSTEMS CORPORATION'S LIST OF SUBSIDIARIES AS OF 12/31/97 JURISDICTION OF INCORPORATION SUBSIDIARY NAME OR ORGANIZATION - ---------------- --------------- PMSI, L.P. Texas Limited Partnership Cybertek Solutions, L.P. Texas Limited Partnership Policy Management Corporation South Carolina PMSC Limited (formerly known as Policy Management Systems Delaware International, Ltd.) ViLink Corporation Delaware Policy Management Systems Canada, Ltd. Canada CYBERTEK Corporation Texas Policy Management Systems Investment, Inc. Delaware Policy Management Systems (Germany) GmbH Germany Policy Management Systems (Barbados), Ltd. Barbados Policy Management Systems Osterreich GmbH Austria Policy Management Systems Norden AS Norway PMSC Pty Limited (formerly known as PMS Asia-Pacific Pty Limited) Australia PMS Creative Limited United Kingdom PMSC Limited (formerly known as PMS Asia Pacific Limited) Hong Kong Information Services Holding, Inc. Delaware Life Software Holding, Inc. Delaware Software Services Holding, Inc. Delaware PMS micado Software Consult GmbH (formerly known as Micado Germany Beteiligungs Und VerwaltungsGmbH) Policy Management Systems Corporation AB (formerly known as Sweden Policy Management Systems Norden Aktiebolag) Policy Management Systems Norden A/S Denmark Creative Computer Systems Pty. Ltd. Australia Creative Solutions B.V. The Netherlands Creative Software Development Limited United Kingdom PMS Creative SA (Proprietary) Limited South Africa Creative Insurance Services Limited United Kingdom Policy Management Systems Europe Limited United Kingdom PMS micado ProduktSysteme Gesellschaft fur EDV Vetrieb mbH Germany Software Consult micado AG/SA/Ltd. Switzerland PMSC Limited (formerly known as PMS Asia-Pacific (NZ) Limited) New Zealand Policy Management Systems India Private Limited India Branch office of PMSC Limited (Delaware) in Singapore Singapore Representative office of Policy Management Systems Europe Limited in Spain Spain PMSC Limited (formerly known as PMS Creative (Ireland) Limited) Ireland Branch office of PMSC Limited (Delaware) in Thailand Thailand EX-23 4 Exhibit 23 Consent of Independent Accountants We consent to the incorporation by reference in the registration statements of Policy Management Systems Corporation (the "Company") on Form S-8 (Nos. 33-59553, 33-59555 and 33-59575) of our report dated February 10, 1998 on our audits of the consolidated financial statements and financial statement schedule of the Company as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997, which report is included in this Annual Report on Form 10-K Coopers & Lybrand L.L.P. Atlanta, Georgia March 23, 1998 EX-27 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS OF POLICY MANAGEMENT SYSTEMS CORPORATION AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 12-MOS DEC-31-1997 DEC-31-1997 32179 3280 131417 2628 0 185809 255955 139522 618406 86213 0 0 0 183 410313 618406 0 582782 0 396794 10454 0 5111 79757 29833 49924 333 0 0 50257 2.76 2.67
EX-27 6
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS OF POLICY MANAGEMENT SYSTEMS CORPORATION AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 12-MOS 12-MOS DEC-31-1996 DEC-31-1995 DEC-31-1996 DEC-31-1995 22121 35094 2234 4615 116996 97782 883 2042 0 0 160342 165593 238219 212751 122462 103568 581386 532736 112636 94461 0 0 0 0 0 0 182 194 363070 382478 581386 532736 0 0 488230 425613 0 0 332885 278677 10240 9142 0 0 4993 3307 70480 19011 25462 9058 45018 9953 979 (6814) 0 0 0 0 45997 3139 2.47 .16 2.44 .16
EX-27 7
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS OF POLICY MANAGEMENT SYSTEMS CORPORATION AS OF AND FOR THE QUARTERS ENDED MARCH 31, 1997 AND 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 3-MOS 3-MOS DEC-31-1997 DEC-31-1996 MAR-31-1997 MAR-31-1996 9993 19474 2492 3820 121398 94563 1402 1463 0 0 167709 177868 244067 215363 127879 107700 567300 553191 106458 81455 0 0 0 0 0 0 182 195 370443 396182 567300 553191 0 0 131187 109937 0 0 88919 72484 2636 2497 0 0 1217 711 15887 17852 5966 6298 9921 11554 171 74 0 0 0 0 10092 11628 .56 .60 .55 .59
EX-27 8
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS OF POLICY MANAGEMENT SYSTEMS CORPORATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 6-MOS 6-MOS DEC-31-1997 DEC-31-1996 JUN-30-1997 JUN-30-1996 9626 17890 2496 2799 132824 107022 764 1115 0 0 178327 175242 248857 223474 132055 113217 580037 544682 98591 99584 0 0 0 0 0 0 182 182 379853 342000 580037 544682 0 0 271815 223944 0 0 186059 150869 5237 5067 0 0 2573 2069 32861 42155 12341 15004 20520 27151 266 280 0 0 0 0 20786 27431 1.14 1.44 1.13 1.42
EX-27 9
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS OF POLICY MANAGEMENT SYSTEMS CORPORATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 9-MOS 9-MOS DEC-31-1997 DEC-31-1996 SEP-30-1997 SEP-30-1996 18639 8030 3006 2400 140172 103743 1057 806 0 0 194164 160708 248732 230093 134375 116589 594173 548372 73991 71159 0 0 0 0 0 0 183 182 394937 351136 594173 548372 0 0 419474 347013 0 0 285715 238620 7792 7637 0 0 3951 3544 53451 55707 20061 19952 33390 35755 333 683 0 0 0 0 33723 36438 1.85 1.94 1.81 1.92
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