10-Q 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2000 Commission file number 1-10557 POLICY MANAGEMENT SYSTEMS CORPORATION (Exact name of registrant as specified in its charter) SOUTH CAROLINA 57-0723125 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) ONE PMSC CENTER (PO BOX TEN) BLYTHEWOOD, SC (COLUMBIA, SC) 29016 (29202) (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (803) 333-4000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 35,585,504 Common shares, $.01 par value, as of August 4, 2000. The information furnished herein reflects all adjustments which are, in the opinion of management, necessary for the fair presentation of the results for the periods reported. Such information should be read in conjunction with the Company's Annual Report on Form 10-K/A for the year ended December 31, 1999. 1
POLICY MANAGEMENT SYSTEMS CORPORATION INDEX PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2000 and 1999 . . . . . . . . 3 Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 . . . . . . . . . . . . . . . . . . . 4 Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income for the Six Months Ended June 30, 2000. . . . . . . . . . . . . . . 5 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999 . . . . . . . . 6 Notes to Consolidated Financial Statements. . . . . . . 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . 37 Item 6. Exhibits and Reports on Form 8-K. . . . . . . 37 Signatures. . . . . . . . . . . . . . . . . . . . . . . 38
2
PART I FINANCIAL INFORMATION POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Six Months Ended June 30, Ended June 30, ------------------ ------------------ 2000 1999 2000 1999 ------ ------ ------ ----- (In thousands, except per share data) REVENUES Licensing. . . . . . . . . . . . . . . $ 26,207 $ 43,697 $ 52,507 $ 78,463 Services . . . . . . . . . . . . . . . 113,867 129,834 235,909 255,357 --------- --------- --------- --------- 140,074 173,531 288,416 333,820 --------- --------- --------- --------- OPERATING EXPENSES Cost of revenues Employee compensation and benefits. . 75,190 76,385 154,510 150,043 Computer and communications expenses. 13,861 11,717 27,512 23,646 Depreciation and amortization of property, equipment and capitalized software costs . . . . . 22,574 17,094 37,268 33,251 Other costs & expenses. . . . . . . . 9,675 9,422 21,978 16,838 Selling, general and administrative expenses . . . . . . . . . . . . . . 26,606 28,362 54,820 53,934 Amortization of goodwill and other intangibles. . . . . . . . . . 3,784 3,461 7,169 6,538 Restructuring and other charges. . . . 3,255 - 16,027 - Merger termination charges . . . . . . 24,347 - 24,347 - --------- --------- --------- --------- 179,292 146,441 343,631 284,250 --------- --------- --------- --------- OPERATING (LOSS) INCOME . . . . . . . . (39,218) 27,090 (55,215) 49,570 Equity in earnings of unconsolidated affiliates. . . . . . 270 148 711 288 Minority interest . . . . . . . . . . . 21 (40) 39 (78) Other income and expenses: Investment income . . . . . . . . . . 3,698 183 6,076 435 Interest expense and other charges. . (6,795) (2,747) (13,478) (4,240) --------- ---------- --------- --------- (3,097) (2,564) (7,402) (3,805) --------- ---------- --------- --------- (Loss) income before income taxes . . . (42,024) 24,634 (61,867) 45,975 Income tax expense (benefit). . . . . . 863 9,122 (6,838) 17,012 --------- ---------- --------- --------- NET (LOSS) INCOME . . . . . . . . . . . $(42,887) $ 15,512 $(55,029) $ 28,963 ========= ========= ========= ========= BASIC (LOSS) EARNINGS PER SHARE . . . . $ (1.21) $ 0.44 $ (1.56) $ 0.81 ========= ========= ========= ========= DILUTED (LOSS) EARNINGS PER SHARE . . . $ (1.21) $ 0.42 $ (1.56) $ 0.77 ========= ========= ========= ========= Weighted average common shares. . . . . 35,380 35,354 35,378 35,739 Weighted average common shares assuming dilution . . . . . . . . . . 35,380 36,584 35,378 37,458 See accompanying notes
3
POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) (Audited) June 30, December 31, 2000 1999 ------ ------ (In thousands, except share data) Assets Current assets Cash and equivalents $ 20,552 $ 17,744 Receivables, net of allowance for uncollectible amounts of $5,353 ($13,000 at December 31, 1999) 102,714 99,669 Accrued revenues 24,889 36,393 Deferred income taxes 17,427 15,979 Income tax receivable 12,622 9,728 Other receivable - 7,788 Prepaids 6,751 12,050 Other 16,209 12,648 --------- --------- Total current assets 201,164 211,999 Property and equipment, at cost less accumulated depreciation and amortization of $126,144 ($132,347 at December 31, 1999) 136,835 142,867 Accrued revenues 24,296 16,130 Income tax receivable 4,041 4,041 Goodwill and other intangibles, net 105,818 111,024 Capitalized software costs, net 155,099 155,896 Deferred income taxes 29,327 29,850 Investments 5,921 13,332 Other 19,684 21,149 --------- --------- Total assets $682,185 $706,288 ========= ========= Liabilities Current liabilities Accounts payable and accrued expenses $ 43,123 41,236 Notes payable 21,000 - Current portion of long-term debt 238,000 4,000 Income taxes payable 4,128 4,616 Unearned revenues 24,148 20,290 Accrued restructuring and other charges 5,113 3,630 Other 1,881 2,223 --------- --------- Total current liabilities 337,393 75,995 Long-term debt - 227,000 Deferred income taxes 72,207 68,514 Accrued restructuring and other charges 3,077 2,659 Other 8,777 9,935 --------- --------- Total liabilities 421,454 384,103 --------- --------- Minority interest 593 624 Stockholders' equity Special stock, $.01 par value, 5,000,000 shares authorized - - Common stock, $.01 par value, 75,000,000 shares authorized, 35,585,581 shares issued and outstanding (35,585,078 at December 31, 1999) 356 356 Additional paid-in capital 56,809 56,695 Retained earnings 232,454 287,483 Accumulated other comprehensive income (19,783) (12,972) Stock employee compensation trust (9,698) (10,001) --------- --------- Total stockholders' equity 260,138 321,561 --------- --------- Total liabilities and stockholders' equity $682,185 $706,288 ========= ========= See accompanying notes
4
POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Unaudited) Accumulated Stock Additional Other Employee Common Paid-In Retained Comprehensive Compensation Stock Capital Earnings Income(1) Trust Total ----- ------- -------- --------- --------- -------- (Dollars in thousands) BALANCE, DECEMBER 31, 1999. . $ 356 $56,695 $287,483 $ (12,972) $(10,001) $321,561 Comprehensive income Net (loss) income. . . . . . - - (55,029) - - (55,029) Other comprehensive income, net of tax: Foreign currency translation adjustments . - - - (6,811) - (6,811) ------- Total comprehensive income. . (61,840) --------- Restricted stock. . . . . . . - 92 - - 303 395 Stock options exercised (1,168 shares). . . . . . . - 22 - - - 22 --------- ------- --------- ------------------ ----- --------- BALANCE, JUNE 30, 2000. . . . $ 356 $56,809 $232,454 $ (19,783) $ (9,698) $260,138 ========= ======= ========= ============= ========= ========= See accompanying notes (1) Comprehensive (loss) income for the three months ended June 30, 2000 and 1999 was $(45,227) and $14,178, respectively. Comprehensive income for the six months ended June 30, 1999 was $25,960.
5
POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, --------------------- 2000 1999 ------ ------ (In thousands) Operating Activities Net (loss) income $ (55,029) $ 28,963 Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities: Depreciation and amortization 47,970 42,509 Deferred income taxes 2,768 6,285 Provision for uncollectible accounts 1,444 (22) Loss on disposal of property and equipment. . . 224 305 Gain on sale of investments (5,298) - Changes in assets and liabilities: Receivables (5,710) (9,437) Accrued revenues 3,338 (29,407) Other receivable 7,788 11,279 Accounts payable and accrued expenses 1,051 (12,010) Accrued restructuring and other charges 2,724 - Income taxes (3,382) 7,518 Unearned revenues 3,858 1,534 Other, net (3,049) (14,071) ---------- ---------- Cash (used) provided by operations (1,303) 33,446 ---------- ---------- Investing Activities Acquisition of property and equipment (9,634) (20,596) Capitalized internal software development costs (24,377) (34,553) Business acquisition and investments (6,816) (67,313) Proceeds from sale of investments . . . . . . . . 17,199 - Other 2,705 1,530 ---------- ---------- Cash used by investing activities (20,923) (120,932) ---------- ---------- Financing Activities Payments on long-term debt (145,000) (34,971) Proceeds from borrowing under credit facility 154,000 165,700 Purchase of stock for Stock Employee Compensation Trust - (10,094) Issuance of common stock under stock option plans 22 6,682 Proceeds from note payable. . . . . . . . . . . . 19,000 Repurchase of common stock - (33,045) Other (2,988) 29 ---------- ---------- Cash provided by financing activities 25,034 94,301 ---------- ---------- Net increase in cash and equivalents 2,808 6,815 Cash and equivalents at beginning of period 17,744 26,013 ---------- ---------- Cash and equivalents at end of period $ 20,552 $ 32,828 ========== ========== Supplemental Information Interest paid $ 6,206 $ 3,211 Income taxes (refunded) paid (4,613) 4,023 6 POLICY MANAGEMENT SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements of Policy Management Systems Corporation (the "Company") have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the "SEC"). These consolidated financial statements include estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the amounts of revenues and expenses. Actual results may differ from those estimated. In the opinion of management, these statements include all adjustments necessary for a fair presentation of the results of all interim periods reported herein. All adjustments are of a normal recurring nature unless otherwise disclosed. Certain information and footnote disclosures prepared in accordance with generally accepted accounting principles either have been condensed or omitted pursuant to SEC rules and regulations. However, management believes that the disclosures made are adequate for a fair presentation of results of operations, financial position and cash flows. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's latest annual report on Form 10-K/A. BASIC AND DILUTED EARNINGS PER SHARE Basic and diluted earnings per share ("EPS") are calculated according to the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share". For the Company, the numerator is the same for the calculation of both basic and diluted EPS, for the three and six months ended June 30, 2000, as the net loss generated in those periods would cause the inclusion of common stock options to be anti-dilutive. The average market price of the stock for the period was below the exercise price for the majority of options outstanding during the period. The following is a reconciliation of the denominator used in the EPS calculations (in thousands):
Three Months Six Months Ended June 30, Ended June 30, ----------------- ----------------- 2000 1999 2000 1999 ----- ----- ----- ----- Weighted Average Shares ------------------------- Basic EPS. . . . . . . . . . . 35,380 35,354 35,378 35,739 Effect of common stock options - 1,230 - 1,719 ------ ------ ------ ------ Diluted EPS. . . . . . . . . . 35,380 36,584 35,378 37,458 ====== ====== ====== ======
Options to purchase 6,367,769 shares of common stock at a weighted average price of $31.52 per share were outstanding but not included in the computation of diluted EPS for the period ending June 30, 2000. 7 OTHER MATTERS Certain prior period amounts have been reclassified to conform to current period presentation. NOTE 2. ACQUISITIONS On May 31, 2000, the Company purchased DEKRU B.V., a Dutch subsidiary of the German based DEKRA Group ("DEKRU"), for approximately $1.1 million in cash plus additional consideration of up to $6.1 million contingent upon the future performance of DEKRU to be recorded as royalty expense as incurred. DEKRU owns a software product (KDX) for managing and adjusting automobile claims. The Company intends to market and further develop KDX primarily for the European market. On June 30, 1999, the Company purchased DORN Technology Group, Inc. ("DORN"), a risk and claims management company, for $33.2 million in cash plus additional consideration based upon the performance of DORN. Pursuant to an amendment to this agreement in the 2000 second quarter, this additional consideration was limited to $1.1 million and was recorded as compensation expense in 1999 and the first half of 2000. DORN owns the Riskmaster claims management software and Quest healthcare facility software, and provides risk and claims management software and services mainly to the US self-insured market. The Company intends to grow DORN's business and further develop the Riskmaster and Quest systems to complement its existing claims products. On June 30, 1999, the Company purchased Financial Administrative Services, Inc.("FAS"), a provider of business process outsourcing ("BPO") for $13.0 million plus additional consideration of up to $12.0 million contingent on the future performance of FAS, to be capitalized as additional goodwill when paid until 2005. FAS uses the Company's PolicyLink system to support the rapid introduction of variable insurance products and annuities in a business process outsourcing environment. The Company intends to grow the business acquired. On March 31, 1999, the Company purchased Legalgard Partners, L.P. ("Legalgard"), a legal cost containment business for $23.2 million plus additional consideration of up to $4.3 million contingent upon the future performance of Legalgard, to be recorded as compensation expense as incurred until 2003. Legalgard provides legal cost containment services mainly to the US property and casualty insurance industry using the Counsel Partnership System, a proprietary software system. The Company intends to continue growing Legalgard's existing services business and developing the technology acquired. The acquisitions above have been recorded using the purchase method of accounting. Accordingly, the Consolidated Statement of Operations of the Company does not include the results of operations before the date of the acquisition. 8 NOTE 3. CONTINGENCIES On June 9, 2000, the Company and Chase Manhattan Mortgage Corporation ("Chase") entered into a confidential settlement of previously disclosed litigation. (See Item 1, Legal Proceedings, of Part II contained in the Company's report on Form 10-Q for the quarter ended March 31, 2000). As part of the settlement, the Company and Chase agreed to release each other from all claims asserted and the lawsuit was dismissed. The amount of settlement was placed in escrow and accrued as an expense in the first quarter of 2000. In January 2000, Computer Sciences Corporation ("CSC") filed a complaint against the Company alleging that the Company and NeuronWorks, an entity retained by the Company in the development of Claims Outcome Advisor ("COA"), misappropriated CSC's trade secrets related to CSC's Colossus product and used such trade secrets in the development of the Company's COA product. The litigation was removed from Texas State court and is currently pending in the United States District Court for the Western District of Texas, Austin Division. CSC's complaint alleges unfair competition, product misappropriation, trade secret theft, tortuous interference with existing and prospective contracts, aiding and abetting breach of fiduciary duty, and civil conspiracy. CSC's complaint seeks preliminary and permanent injunctive relief, damages, attorneys' fees and punitive damages, all in an unspecified amount. The Company has denied the allegations against it and asserted various affirmative defenses and counterclaims against CSC, including counterclaims for unfair trade practices, false representation, false promotion and commercial disparagement under the Lanham Act, business disparagement, injurious falsehood, defamation, and tortuous interference with existing and prospective contractual and business relationships. On March 22, 2000, a hearing was held on CSC's request for preliminary injunctive relief to enjoin the Company from marketing and licensing COA. CSC's request for preliminary injunctive relief was denied. The case has been set for trial in December 2000. The Company believes CSC's remaining claims are without merit and is vigorously defending this matter and pursuing relief on the Company's claims. On May 22, 2000 an amended consolidated complaint was filed in the previously disclosed purported class action filed on behalf of purchasers of the Company's stock during the period October 22, 1998 and February 10, 2000. (See Item 1, Legal Proceedings, of Part II contained in the Company's report on Form 10-Q for the quarter ended March 31, 2000). The defendants have filed a motion to dismiss the complaint and intend to vigorously pursue a full defense of the action. 9 Also on May 22, 2000, an amended complaint was filed in the previously disclosed purported class action brought by one of the Company's employees, suing allegedly on behalf of herself and all former or current participants in the Company's 401(k) Retirement Savings Plan ("Plan") during the period October 22, 1998 through February 10, 2000, against the Company, its Chairman and three members of the Administrative Committee of the Plan. The amended complaint alleges that the Plan's investment in the Company's stock violated Sections 502 (a) (2) and (3) of ERISA and constituted a breach of fiduciary duty given defendants' alleged knowledge that the Company's stock price was artificially inflated throughout the class period as a result of the same series of alleged materially false and misleading statements that form the basis of the securities class action described above. The court has entered an order providing for the coordination of proceedings with the securities class action. The defendants have filed a motion to dismiss the complaint and intend to vigorously pursue a full defense of this action. As previously disclosed, between March 31, 2000 and May 5, 2000 four purported class actions were filed against the Company and its directors in the Court of Common Pleas in Richland County, South Carolina. (See Item 1, Legal Proceedings, of Part II contained in the Company's report on Form 10-Q for the quarter ended March 31, 2000). These actions were consolidated into a single action and an amended consolidated complaint was filed on July 24, 2000. The amended consolidated complaint alleges that the defendants breached their fiduciary duties by failing to conduct a market check and agreeing to an unreasonable termination fee in the June 20, 2000 Agreement and Plan of Merger between the Company and Computer Sciences Corporation (CSC transaction) and breached their duty of candor in failing to disclose material information concerning the CSC transaction. The plaintiffs seek preliminary and permanent injunctive relief to enjoin payment of the termination fee under the Agreement and Plan of Merger between Politic Acquisition Corp. and the Company (Welsh Carson transaction) which was terminated by the Company. Plaintiffs also seek to enjoin consummation of the CSC tender offer until additional disclosures are made, to strike the termination fee in the CSC transaction, and seek reasonable attorney fees and costs. The plaintiffs' request for a temporary injunction was denied on August 7, 2000 following a hearing on plaintiffs' request. Defendants have filed a motion to dismiss the amended complaint and intend to vigorously pursue a full defense of this action. 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. In a letter dated April 29, 1999, the Company was notified by the Internal Revenue Service ("IRS") of proposed adjustments to its 1994, 1995 and 1996 federal income tax returns. Should the IRS prevail in its position, a charge to income of approximately $16.3 million would result. The Company has submitted a response to the IRS and is awaiting a formal response. Furthermore, the Company strongly disagrees with the proposed adjustments and is vigorously defending its position. 10 Resolution of any of the above matters could have a material adverse effect on the results of operations and consolidated financial position of the Company in future periods. While the Company does not expect these matters to have a material adverse effect in future periods it is unable to predict the ultimate outcome or the potential financial impact of these matters. 11 NOTE 4. SEGMENT INFORMATION The Company's operating segments are the four revenue-producing components of the Company for which separate financial information is produced for internal decision making and planning purposes. The segments are as follows: 1. Property and casualty enterprise software and services (generally referred to as "property and casualty"). This segment provides software products, product support, professional services and outsourcing primarily to the US property and casualty insurance market. 2. Claims and risk management (generally referred to as "claims"). This segment provides software products, product support, professional services and outsourcing primarily to the claims management function of the US insurance industry and risk management, i.e. self-insured, marketplace. Prior to the 2000 first quarter, claims was included in the property and casualty segment. 3. Life and financial solutions enterprise software and services (generally referred to as "life and financial solutions"). This segment provides software products, product support, professional services and outsourcing primarily to the US life insurance and related financial services markets. 4. International. This segment provides software products, product support, professional services and outsourcing to the property and casualty and life insurance markets primarily in Europe, Asia, Australia and Canada. 12 Information about the Company's operations for the three and six months ended June 30, 2000 and 1999 is as follows (in thousands):
Three Months Six Months Ended June 30, Ended June 30, ------------------ ------------------ 2000 1999 2000 1999 ------ ------ ------ ------ REVENUES FROM EXTERNAL CUSTOMERS Property and casualty. . . . . . . $ 50,052 $ 70,321 $104,503 $141,145 Claims.. . . . . . . . . . . . . . 6,065 6,756 13,382 9,623 Life and financial solutions . . . 46,844 47,531 94,712 89,165 --------- --------- --------- --------- Total US revenues. . . . . . . . 102,961 124,608 212,597 239,933 International. . . . . . . . . . . 37,113 48,923 75,819 93,887 --------- --------- --------- --------- Total revenues . . . . . . . . . $140,074 $173,531 $288,416 $333,820 ========= ========= ========= ========= INCOME (LOSS) FROM OPERATIONS Property and casualty. . . . . . . $ 4,236 $ 17,588 $ 9,425 $ 37,178 Claims.. . . . . . . . . . . . . . (1,717) 3,297 (3,001) 5,601 Life and financial solutions . . . 504 10,759 (2,533) 18,867 Corporate and US administrative. . (43,006) (8,210) (55,881) (16,233) --------- --------- --------- --------- Total US operating (loss) income (39,983) 23,434 (51,990) 45,413 --------- --------- --------- --------- International. . . . . . . . . . . 2,516 5,519 470 7,799 International administrative . . . (1,751) (1,863) (3,695) (3,642) --------- --------- --------- --------- Total international. . . . . . . 765 3,656 (3,225) 4,157 --------- --------- --------- --------- Operating (loss) income. . . . . (39,218) 27,090 (55,215) 49,570 Equity in earnings of unconsolidated affiliates. . . . 270 148 711 288 Minority interest. . . . . . . . . 21 (40) 39 (78) Other income and expenses. . . . . (3,097) (2,564) (7,402) (3,805) Income tax (benefit) expense . . . 863 9,122 (6,838) 17,012 --------- --------- --------- --------- Net (loss) income. . . . . . . . $(42,887) $ 15,512 $(55,029) $ 28,963 ========= ========= ========= =========
NOTE 5. SPECIAL CHARGES AND ACCOUNTING CHANGES The Company considers Special Charges to be unusual events or transactions related to continuing business activities. Accounting Changes include changes in accounting principles and estimates that require a cumulative catch-up adjustment in accordance with Accounting Principles Board Opinion No. 20, "Accounting Changes". Second Quarter 2000: The Company's results for the 2000 second quarter include pre-tax special charges of approximately $36.8 million. Of this amount, $8.3 million is non-cash and the remainder of these charges have or will be paid in cash. 13 The majority of the second quarter Special Charges result from merger termination charges of $24.3 million in fees and expenses resulting from the Company's termination of the merger agreement with a subsidiary of Welsh, Carson, Anderson & Stowe VIII, L.P. ("WCAS") (see Note 6, "Proposed Merger"). During the 2000 second quarter, management committed to a plan to restructure the operations of the United Kingdom ("UK") division of its international segment. The plan, among other things, entailed reductions in staff and space which resulted in a restructuring charge of approximately $1.2 million. Further, management indefinitely suspended development and decreased marketing efforts related to a software product in the UK. As a result, second quarter Special Charges include $7.3 million of accelerated amortization to write-off this product. During the second quarter the Company transferred operational responsibility for the Banking division's mortgage origination software business to a third party. Additionally, the Company is negotiating the sale of this business and the remainder of the Banking division's operations. The 2000 second quarter Special Charges include the Banking division operating loss of $3.6 million on revenues of $2.8 million. Also, as a result of the decision to sell the Banking division's operations, Special Charges include $1.1 million of accelerated amortization to write-off a related software product. The Company recognizes certain revenue under the percentage of completion method of accounting ("POC") in accordance with Statement of Position 81-1. During the 2000 second quarter, management changed the estimated profit margin on a significant contract accounted for under POC. Based on a detailed review of contract performance in the second quarter, the Company recognized a cumulative adjustment of $1.5 million of additional professional services & ITO ("Information Technology Outsourcing") revenue in the 2000 second quarter which partially offset special charges. During the second quarter the Company sold minority interests in two companies for $9.4 million in cash. Special Charges in the quarter are partially offset by the related gain of $3.2 million on the sale of these investments included in Other income and expense. Selling, general and administrative expenses for the 2000 second quarter include approximately $0.7 million of brand expenses associated with changing the name of the Company (see Note 7, "Change of Company's Name"). Restructuring and other charges includes $2.1 million in legal fees incurred during the second quarter related to the shareholder and CSC litigation (see Note 3, "Contingencies"). Interest expense includes $1.1 million of amortization of credit facilities fees paid in the 2000 first quarter to amend the Company's existing credit facilities. 14 First Quarter 2000: The Company's results for the 2000 first quarter include pre-tax special charges of approximately $12.7 million which are net of a $2.1 million gain on the sale of the Company's 20 percent interest in an unconsolidated subsidiary and a $1.2 million recovery of a Banking division receivable which was initially reserved as a special charge in the 1999 fourth quarter. The majority of these charges have or will be paid in cash. Restructuring and other charges of approximately $12.8 million includes approximately $7.6 million of severance related to the reduction in force of approximately 6% or 350 employees, announced in the 2000 first quarter. Additionally, $5.2 million is included for customer dispute and litigation costs (see Note 3, "Contingencies"). During the 2000 second quarter the Company transferred operational responsibility for the Banking division's mortgage origination software business to a third party. Additionally, the Company is negotiating the sale of this business and the remainder of the Banking division's operations. The 2000 first quarter Special Charges include the Banking division operating loss of $4.8 million on revenues of $2.8 million including the recovery of previously reserved accounts receivable of $1.2 million. The Company continues to recognize amortization expense related to software products written down in the 1999 third and fourth quarters. These products are being amortized on the revenue basis which is faster than the straight-line method. Revenue based amortization related to products written down in the 1999 third and fourth quarters resulted in approximately $1.0 million more amortization expense in the 2000 first quarter than would have been recognized under the straight-line method. Selling, general and administrative expenses for the 2000 first quarter includes approximately $1.4 million of brand expenses associated with changing the name of the Company (see Note 7, "Change of Company's Name"). Investment income in the 2000 first quarter included a $2.1 million gain on the sale of the Company's 20% interest in an unconsolidated subsidiary, and interest expense included $1.0 million of amortization of credit facilities fees paid in the 2000 first quarter to amend the Company's existing credit facilities. NOTE 6. PROPOSED MERGER On June 20, 2000, the Company announced that it and Computer Sciences Corporation ("CSC") entered into an Agreement and Plan of Merger which, among other things, provided for a CSC tender offer to acquire the Company's outstanding shares at a purchase price of $16 per share in cash. On June 28, 2000, the Company filed its Solicitation/Recommendation Statement on Schedule 14D-9 related to CSC's tender offer. As a result of receiving a second request for information from the Federal Trade Commission concerning the proposed merger, CSC extended the tender offer until September 12, 2000. 15 As a result of entering the Agreement and Plan of Merger with CSC, the Company was required to pay a $19.0 million fee and to pay up to $5.0 million in expenses for terminating its previously proposed merger with WCAS. The cash required to pay this fee was loaned to the Company by CSC. NOTE 7. CHANGE OF COMPANY'S NAME Following an earlier announcement of plans to change the Company's name, the Company began doing business as Mynd Corporation ("Mynd") on May 1, 2000. Officially changing the Company's name requires a two-thirds vote of the shareholders at a shareholder's meeting for holders of record on September 5, 2000, to be held on September 27, 2000, at the Company's headquarters. If approved by the shareholders, the Company will formally change its legal name with relevant authorities including the New York Stock Exchange. 16 POLICY MANAGEMENT SYSTEMS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto contained in Part I of this report on Form 10-Q and with the Company's Annual Report on Form 10-K/A for the year ended December 31, 1999. 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:
2000 vs. 1999 Percent Percentage of Revenues Increase (Decrease) -------------------------- -------------------- Three Six Three Six Months Ended Months Ended Months Months June 30, June 30, Ended Ended ----------- ----------- 2000 1999 2000 1999 June 30 ----- ----- ----- ----- --------------------- Revenues Licensing . . . . . . . . . . . . . 18.7% 25.2% 18.2% 23.5% (40)% (33)% Services. . . . . . . . . . . . . . 81.3 74.8 81.8 76.5 (12) (8) ------------- ------------- ------ ------ 100.0 100.0 100.0 100.0 (19) (14) ------------- ------------- ------ ------ Operating expenses Cost of revenues Employee compensation and benefits 53.7 44.0 53.6 45.0 (2) 3 Computer & communication expenses. 9.9 6.8 9.5 7.0 18 16 Depreciation & amortization of property, equipment & capitalized software costs. . . . 16.1 9.9 12.9 10.0 32 12 Other costs & expenses . . . . . . 6.9 5.4 7.6 5.0 3 31 Selling, general & administrative expenses . . . . . 19.0 16.3 19.0 16.1 (6) 2 Amortization of goodwill and other intangibles . . . . . . . . 2.7 2.0 2.5 2.0 9 10 Restructuring & other charges . . . 2.3 - 5.6 - Merger termination charges. . . . . 17.4 - 8.4 - ------------- ------------- ------ ------ 128.0 84.4 119.1 85.1 22 21 ------------- ------------- ------ ------ Operating (loss) income. . . . . . . (28.0) 15.6 (19.1) 14.9 (245) (211) Equity in earnings of unconsolidated affiliates. . . . . . . . . . . . 0.2 0.1 0.2 0.1 82 147 Investment income. . . . . . . . . . 2.7 0.1 2.1 0.1 1,921 1,297 Interest expense and other charges . (4.9) (1.6) (4.7) (1.3) 147 218 ------------- ------------- ------ ------ Income (loss) before income taxes. . (30.0) 14.2 (21.5) 13.8 (271) (235) Income tax (benefit) expense . . . . 0.6 5.2 (2.4) 5.1 (91) (140) ------------- ------------- ------ ------ Net (loss) income. . . . . . . . . . (30.6)% 9.0% (19.1)% 8.7% (376)% (290)% ============= =============
17 THREE MONTH COMPARISON REVENUES Licensing --------- In licensing the Company's products, customers generally obligate themselves to a non-refundable initial license charge and a monthly license fee payable over a specified period of time, which is usually six years. The monthly license charge entitles the customer, over the contract period, to use the licensed product and to receive product support and enhancements.
Three Months Ended June 30, ---------------- 2000 1999 Change ----- ----- ------ (Dollars in millions) Initial charges. . . . . . . $ 9.5 $26.8 (65)% Monthly charges. . . . . . . 16.7 16.9 (1) ------ ------ $26.2 $43.7 (40)% ====== ====== Percentage of total revenues 18.7% 25.2% ------ ------
Initial licensing Initial license revenues decreased $17.3 million for the 2000 second quarter compared with the 1999 second quarter, with the following decreases by business segment: property and casualty down 92% ($8.3 million); claims down 56% ($2.4 million); life and financial solutions down 35% ($2.0 million) with one new CyberLife license in the quarter; and international down 58% ($4.6 million) with a S3+ license expansion to include the acquirer of an existing customer in Europe. Initial license charges for the second quarter of 2000 included right-to-use licenses to existing customers of $0.5 million. This compares to $5.3 million in right-to-use licenses for the second quarter of 1999. Right-to-use licenses represent the acquisition by certain customers of the right-to-use component of their remaining monthly license charge obligation, if any, plus the acquisition of a perpetual right-to-use the product thereafter. Since these types of licenses represent an acceleration of future revenues, they reduce future monthly license charges. Second quarter 1999 initial license charges include $2.0 million of licenses to the former owners of FAS which the Company acquired at the end of the second quarter. 18 Two remarketing agreements for Claim Outcome Adviser ("COA") totaling $3.5 million are included in initial licensing revenue for the second quarter of 1999. These non-exclusive agreements provide two of the Company's nationally recognized vendors the right to relicense COA to the self-insured market. The Company also renegotiated with one of these vendors an extension to its long-term license agreement for operating software used in the Company's data center. These agreements were effected by the Company's adoption of Staff Accounting Bulletin 101 as of December 31, 1999. Consequently, the $3.5 million of initial license revenue was adjusted in the 1999 fourth quarter and is being recognized ratably over the terms of the respective agreements. Initial license revenue includes $0.7 million of this revenue in the 2000 second quarter. The increasing rate of change in the insurance and banking industries coupled with the rapid evolution of eCommerce technology and the volatility of initial license revenues, as illustrated by the above table, is leading the Company to consider new business models that place less emphasis on initial license revenue and place more emphasis on transaction based revenue. The Company expects this transition to occur gradually over the next several years and will likely affect the amount and timing of revenue recognized in the Company's financial statements. The Company believes that during the 2000 second quarter, uncertainty concerning the Company's future ownership, including the proposed merger with CSC, adversely affected customers' decisions to license software from the Company. Management anticipates that the adverse effect will continue until the uncertainty is resolved. Set forth below is a comparison of initial license revenue by segment for the periods ending June 30, 2000 and 1999, respectively:
Three Months Ended June 30, ---------------- 2000 1999 Change ----- ----- ------ (Dollars in millions) Property and casualty . . . . . . . . $0.7 $ 9.0 (92)% Claims. . . . . . . . . . . . . . . . 1.8 4.2 (57) Life and financial solutions. . . . . 3.7 5.7 (35) International . . . . . . . . . . . . 3.3 7.9 (58) ----- ------ $9.5 $26.8 (65)% ===== ====== Percentage of total revenues 6.8% 15.4% ----- ------
Monthly licensing Monthly license revenues in the 2000 second quarter were essentially consistent with the 1999 second quarter in total with the following increases or decreases by business segment: property and casualty down 21% ($1.5 million) due to weak 1999 and 2000 first quarter licensing and the effect of previous right-to-use licenses; claims up 650% ($1.3 million); life and financial solutions and international were relatively unchanged at $4.9 million and $4.5 million for both quarters, respectively. 19 Set forth below is a comparison of monthly license revenue by segment for the periods ending June 30, 2000 and 1999, respectively:
Three Months Ended June 30, ---------------- 2000 1999 Change ----- ----- ------ (Dollars in millions) Property and casualty. . . . $ 5.8 $ 7.3 (21)% Claims . . . . . . . . . . . 1.5 0.2 650 Life and financial solutions 4.9 4.9 - International. . . . . . . . 4.5 4.5 - ----- ------ $16.7 $16.9 (1)% ===== ====== ===== Percentage of total revenues 11.9% 9.8% ----- -----
Services --------- The Company's services revenue consists primarily of Professional Services & Information Technology Outsourcing ("ITO") and Business Process Outsourcing ("BPO"). Services revenue is derived from professional support services, which include implementation and integration assistance, consulting and education services and outsourcing services.
Three Months Ended June 30, ---------------- 2000 1999 Change ----- ----- ------ (Dollars in millions) Professional services & ITO. $ 86.9 $111.1 (22)% BPO. . . . . . . . . . . . . 25.0 16.9 48 Other. . . . . . . . . . . . 2.0 1.8 11 ------- ------- $113.9 $129.8 (12)% ======= ======= Percentage of total revenues 81.3% 74.8% ------- -------
Professional Services & ITO Professional services & ITO revenues decreased $24.2 million for the 2000 second quarter compared with the 1999 second quarter, with the following decreases and increase by business segment: property and casualty down 27% ($10.9 million); claims up 13% ($0.3 million); life and financial solutions down 12% ($3.8 million); and international down 27% ($9.8 million). The increase in claims is primarily due to the Company's 1999 acquisitions. All other segments were negatively impacted by weak initial licensing activity in 1999 and the first half of 2000. In addition, property and casualty was affected by the migration of ITO customers from mainframe Series II processing to AS400 Point processing. Also, international was adversely affected by the loss of a significant ITO customer in the 1999 third quarter. The 2000 second quarter international segment's revenue includes a cumulative catch-up adjustment of approximately $1.5 million of revenue recognized in the 2000 second quarter based on a change in accounting estimate associated with a significant contract accounted for on the basis of POC. 20 Set forth below is a comparison of professional services & ITO revenue by segment for the periods ending June 30, 2000 and 1999, respectively:
Three Months Ended June 30, ---------------- 2000 1999 Change ----- ----- ------ (Dollars in millions) Property and casualty. . . . $ 29.9 $ 40.8 (27)% Claims . . . . . . . . . . . 2.7 2.4 13 Life and financial solutions 28.1 31.9 (12) International. . . . . . . . 26.2 36.0 (27) ------- ------- $ 86.9 $111.1 (22)% ====== ====== ====== Percentage of total revenues 62.1% 64.1% ------ -------
BPO BPO revenues increased $8.1 million for the 2000 second quarter compared with the 1999 second quarter, with the following increases by business segment: property and casualty up 5% ($0.6 million); life and financial solutions up 100% ($5.1 million) due to internal growth and the acquisition of FAS ($2.8 million) in 1999; and international up 1,200% ($2.4 million) due to increased processing in Europe and South Africa. The claims segment has no BPO operations. Set forth below is a comparison of BPO revenue by segment for the periods ending June 30, 2000 and 1999, respectively:
Three Months Ended June 30, ---------------- 2000 1999 Change ----- ----- ------ (Dollars in millions) Property and casualty. . . . $ 12.2 $11.6 5% Claims . . . . . . . . . . . - - - Life and financial solutions 10.2 5.1 100 International. . . . . . . . 2.6 0.2 1,200 ------ ----- ------ $ 25.0 $16.9 48% ====== ===== ====== Percentage of total revenues 17.8% 9.7% ------- ------
21 OPERATING EXPENSES COST OF REVENUES Employee compensation and benefits decreased 2% for the 2000 second quarter compared with the 1999 second quarter. Before the effect of the acquisitions in 1999 (see Note 2 of Notes to Consolidated Financial Statements), employee compensation and benefits for the second quarter of 2000 decreased 7% when compared with second quarter 1999. Domestic employee compensation in the 2000 second quarter is essentially consistent with the 1999 second quarter. Domestic benefits expense increased $1.3 million due to the acceleration of health claims paid as a result of previous reductions in force. International compensation and benefits decreased 15% ($3.3 million) largely due to previous reductions in force. Computer and communications expenses increased 18% for the 2000 second quarter compared with the 1999 second quarter due to the Company's 1999 acquisitions and increases in processing volumes and data center operating software license fees. Depreciation and amortization of property, equipment and capitalized software costs increased 32% for the 2000 second quarter compared with the 1999 second quarter. Depreciation and amortization expense was reduced as a result of software write-downs recorded in the 1999 third and fourth quarters and a reduction in the Company's capital expenditures for property, plant and equipment. However, these savings were more than offset by the 2000 second quarter software write-offs discussed below and the acquisitions of Dorn and FAS in 1999 (see Note 5 of Notes to Consolidated Financial Statements). As part of the UK restructuring plan (see Note 5 of Notes to Consolidated Financial Statements), management indefinitely suspended development and decreased marketing efforts related to a software product in the UK. As a result, approximately $7.3 million of previously capitalized software development costs has been expensed as accelerated amortization. An additional $1.1 million of accelerated amortization was similarly recognized in connection with the decision to sell the Banking division operations. The Company continues to recognize amortization expense related to software products written down in the 1999 third and fourth quarters. As a reflection of their estimated impaired status, these products are being amortized on the revenue basis which is faster than straight-line method. Revenue based amortization related to products written down in the 1999 third and fourth quarters resulted in approximately $0.3 million more amortization expense in the 2000 second quarter than would have been recognized under the straight-line method. Other operating costs and expenses increased 3% for the second quarter of 2000 compared with the 1999 second quarter due to the Company's acquisitions in 1999 and a decrease in the amounts capitalized related to internal software development and internal use systems. 22 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased from 16% of revenues in the 1999 second quarter compared to 19% in the 2000 second quarter. However, the dollar amount decreased 6% for the 2000 second quarter compared with the 1999 second quarter in part due to the reduction in force and decreased costs associated with the Company's lower revenues offset by the effects of the Company's 1999 acquisitions and approximately $0.7 million of brand expenses associated with changing Company's name. Before the effects of acquisitions and brand expenses, selling, general and administrative expenses decreased 14%. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES Amortization of goodwill and other intangibles increased 9% for the 2000 second quarter compared with the 1999 second quarter, due largely to the Company's 1999 acquisitions. RESTRUCTURING AND OTHER CHARGES Restructuring and other charges include approximately $1.2 million of cash charges paid or to be paid as a result of initiatives taken by the Company in the 2000 second quarter for an international reduction in force of 37 employees in the UK. Additionally, restructuring and other charges includes legal expenses ($2.1 million) associated with the CSC and shareholder lawsuits (see Note 3 of Notes to Consolidated Financial Statements). MERGER TERMINATION CHARGES Merger termination charges include a $19.0 termination fee and $5.3 million of accrued expenses resulting from the Company's termination of the WCAS merger (see Note 6 of Notes to Consolidated Financial Statements). OPERATING INCOME (LOSS) The 2000 second quarter operating loss of $39.2 million includes net Special Charges of approximately $38.8 million (see Note 5 of Notes to Consolidated Financial Statements). The 1999 second quarter operating income was $27.1 million including the Banking division which is treated as Special Charges in the 2000 second quarter. Exclusive of the Banking division, 1999 first quarter operating income was $25.9 million by comparison to the 2000 second quarter operating loss before special charges of $0.4 million. 23 Set forth below is a comparison of operating income (loss) by segment for the periods ending June 30, 2000 and 1999, respectively:
Three Months OPERATING INCOME (LOSS) Ended June 30, ---------------- 2000 1999 Changes ----- ----- ------- (Dollars in millions) Property and casualty. . . . $ 4.2 $17.5 (76)% Claims . . . . . . . . . . . (1.7) 3.3 (152) Life and financial solutions 0.5 10.8 (95) Corporate. . . . . . . . . . (43.0) (8.2) (424) International. . . . . . . . 0.8 3.7 (78) ------ ------- ------ $(39.2) $27.1 (245)% ====== ======= ======
Property and casualty operating income decreased $13.3 million or 76% due primarily to an $8.3 million decrease in initial license charges and a $10.9 million decline in professional services & ITO revenue. Additionally, professional services & ITO margins declined from 33% to 21%. Claims segment operating income decreased $5.0 million to a loss of $1.7 million due primarily to $2.4 million lower initial license charges in the 2000 second quarter and higher operating costs due to 1999 acquisitions. Life and financial solutions segment operating income declined $10.3 million or 95% due primarily to the operating loss of the Banking division ($3.6 million), lower initial license charges ($2.0 million) and a decline in professional services & ITO revenue and margins. Not withstanding the Company's reduction in force, the reduction in expense lagged behind the decline in revenues resulting in lower margins in its property and casualty and life segments. International segment operating income declined $2.9 million or 78% primarily due to a $4.6 million decline in initial license charges offset by savings from the 1999 third quarter restructuring. Before special charges the international segment's operating income increased $4.3 million of 118% compared to the 1999 second quarter reflecting the benefits of previous restructuring. A significant portion of both the Company's revenues and its operating income is derived from initial licensing agreements received as part of the Company's software licensing activities. Because a substantial portion of initial licensing revenues are recorded at the time new systems are licensed, there can be significant fluctuations from quarter to quarter in 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. 24 Set forth below is a comparison of initial license revenues for the last eight quarters expressed as a percentage of total revenues of each of the periods presented:
2000 1999 1998 ----- ---------------- --------- 2nd 1st 4th 3rd 2nd 1st 4th 3rd (Dollars in Millions) ---------- -------------------------- ------------ Initial license revenues $9.5 9.1 $8.7 $19.2 $26.8 $17.5 $27.4 $14.7 % of total revenues 6.8% 6.1% 6.1% 11.4% 15.4% 11.0% 16.0% 9.7%
The increasing rate of change in the insurance and banking industries coupled with the rapid evolution of eCommerce technology and the volatility of initial license revenues, as illustrated by the above table, is leading the Company to consider new business models that place less emphasis on initial license revenue and place more emphasis on transaction based revenue. The Company expects this transition to occur gradually over the next several years and will likely affect the amount and timing of revenue recognized in the Company's financial statements. The Company believes that during the second quarter, uncertainty concerning the Company's future ownership, including the proposed merger with CSC, adversely affected customers' decisions to license software from the Company. Management anticipates that this adverse effect will continue until the uncertainty is resolved. OTHER INCOME AND EXPENSE Investment income includes a $3.2 million gain on the sale of investments. Interest expense and other charges is comprised primarily of interest expense which increased $4.0 million for the 2000 second quarter compared with the 1999 second quarter, principally due to higher levels of borrowed funds under the Company's credit agreements along with higher interest rates and $1.2 million of amortization expense for credit facilities fees paid in the 2000 first quarter to amend the Company's credit agreements. The nominal interest rate applicable to borrowings under the Company's credit facilities during the second quarter of 2000 ranged from 7.375% to 9.5% compared to a range of 5.1625% to 5.25% in the 1999 second quarter. INCOME TAXES The effective income tax rate (income taxes expressed as a percentage of pre-tax income) was -2.1% and 37.0% for the second quarters of 2000 and 1999, respectively. The effective rate for the three months ended June 30, 2000 is not comparable to the three months ended June 30, 1999 due primarily to non-tax effected merger related costs incurred during the period and the establishment of a valuation allowance for certain deferred tax assets. The valuation allowance was established due to the uncertain realization of those assets in light of the Company's operating performance in the 2000 second quarter. 25 SIX MONTH COMPARISON REVENUES
Six Months Ended June 30, ---------------- Licensing 2000 1999 Change ----- ----- ------ (Dollars in millions) Initial charges. . . . . . . $18.6 $44.3 (58)% Monthly charges. . . . . . . 33.9 34.2 (1) ------ ------ $52.5 $78.5 (33)% ====== ====== Percentage of total revenues 18.2% 23.5% ------ ------ Initial licensing ------------------------------
Initial license revenues decreased $25.7 million for the first six months of 2000 compared with the first six months of 1999, with the following decreases by business segment: property and casualty down 90% ($15.4 million) due primarily to right-to-use agreements included in the first six months of 1999; claims down 37% ($2.6 million) due primarily to remarketing agreements included in the first six months of 1999; life and financial solutions down 42% ($3.7 million) with no Banking division licenses in 2000 compared with strong Banking division licenses in the first half of 1999; and international down 36% ($4.0 million). Initial license charges for the first six months of 2000 include right-to-use licenses to existing customers of $0.5 million compared with $11.2 million for the first six months of 1999. Right-to-use licenses represent the acquisition by certain customers of the right-to-use component of their remaining monthly license charge obligation, if any, plus the acquisition of a perpetual right-to-use the product thereafter. Since these types of licenses represent an acceleration of future revenues, they reduce future monthly license charges. The Company expects the occurrence of right-to-use licenses to be minimal in the future. Initial license charges for the first six months of 1999 include the first license of the Company's new workplace injury claims management tool, COA, which was licensed in conjunction with the purchase of Legalgard and $2.0 million of licenses to the former owners of FAS which the Company acquired at the end of the second quarter. Two remarketing agreements for COA, totaling $3.5 million, are included in initial licensing revenues for the first six months of 1999. These non-exclusive agreements provide two of the Company's nationally recognized vendors the right to re-license COA to the self-insured market. The Company also renegotiated with one of these vendors an extension to its long-term license agreement for operating software used in the Company's data center. These agreements were affected by the Company's adoption of Staff Accounting Bulletin 101 as of December 31, 1999. Consequently, the $3.5 million of initial license revenue was adjusted in the 1999 fourth quarter and is being recognized ratably over the terms of the respective agreements. Initial license revenue includes $1.7 million of this revenue in the first six months of 2000. 26 The increasing rate of change in the insurance and banking industries coupled with the rapid evolution of eCommerce technology and the volatility of initial license revenues, as illustrated by the above table, is leading the Company to consider new business models that place less emphasis on initial license revenue and place more emphasis on transaction based revenue. The Company expects this transition to occur gradually over the next several years and will likely affect the amount and timing of revenue recognized in the Company's financial statements. The company believes that lingering customer Y2K concerns, uncertainty surrounding the Company's credit agreements and the delayed filing of the Company's 1999 annual report had a negative effect on initial licensing activity in the 2000 first quarter. Furthermore, the Company believes that the WCAS merger agreement, and its subsequent termination upon entering into the merger agreement with CSC made it difficult for the Company to conclude initial licenses with customers in the second quarter due to uncertainties concerning the Company's ownership. Set forth below is a comparison of initial license revenue by segment for the periods ending June 30, 2000 and 1999, respectively:
Six Months Ended June 30, ---------------- 2000 1999 Change ----- ----- ------ (Dollars in millions) Property and casualty. . . . $1.8 $17.2 (90)% Claims . . . . . . . . . . . 4.5 7.1 (37) Life and financial solutions 5.2 8.9 (42) International. .. . 7.1 11.1 (36) ----- ----- ------ $18.6 $44.3 (58)% ===== ====== Percentage of total revenues 6.5% 13.3% ----- ------
Monthly licensing - Monthly license charges decreased $0.3 million for the first six months of 2000 compared with the first six months of 1999 with the following increases or decreases by business segment: property and casualty down 17% ($2.6 million) due to weak 1999 and 2000 first half licensing and the effect of right-to-use licenses; claims up $2.8 million primarily due to the effect of 1999 second quarter acquisitions (see Note 2 of Notes to Consolidated Financial Statements); life and financial solutions was relatively unchanged; and international down 5% ($0.5 million). 27
Six Months Ended June 30, ---------------- 2000 1999 Change ----- ----- ------ (Dollars in millions) Property and casualty. . . . $12.3 $ 14.9 (17)% Claims . . . . . . . . . . . 2.9 0.1 2,800 Life and financial solutions 9.9 9.9 - International. . . . . . . . 8.8 9.3 (5) ----- ------- ------ $33.9 $ 34.2 (1)% ===== ======= ====== Percentage of total revenues 11.8% 10.3% ----- ------
Six Months Ended June 30, ---------------- Services 2000 1999 Change ----- ----- ------ (Dollars in millions) Professional services & ITO. $184.8 $221.0 (16)% BPO. . . . . . . . . . . . . 48.1 32.2 49 Other. . . . . . . . . . . . 3.0 2.1 43 ------- ------- $235.9 $255.3 (8)% ======= ======= Percentage of total revenues 81.8% 76.5% ------- -------
Professional services & ITO Professional services & ITO revenues decreased $36.2 million for the first six months of 2000 compared with the first six months of 1999, with the following decreases or increases by business segment: property and casualty down 24% ($20.3 million); claims up 146% ($3.5 million); life and financial solutions down 3% ($1.8 million); and international down 24% ($17.6 million). The decreases are principally due to weak initial licensing activity during 1999 and the first half of 2000. In addition, property and casualty was adversely affected by the migration of ITO customers from mainframe Series II processing to AS400 Point processing. Also, international was adversely affected by the loss of a significant ITO customer in the 1999 third quarter. In the first six months of 2000, the international segment's revenue includes a $1.5 million cumulative catch-up adjustment based on a change in accounting estimate associated with a significant contract accounted for on the basis of POC. The property and casualty segment's 1999 six month revenues include $1.6 million for professional services rendered and received in connection with the settlement of a dispute with a customer who has terminated its relationship with the Company. Amounts paid by the Company in connection with the resolution of this dispute were covered by insurance and existing legal reserves and had no impact on the Company's operating results. 28 Set forth below is a comparison professional services & ITO revenue by segment for the periods ending June 30, 2000 and 1999, respectively:
Six months Ended June 30, ---------------- 2000 1999 Change ----- ----- ------ (Dollars in millions) Property and casualty. . . . $ 64.1 $ 84.4 (24)% Claims . . . . . . . . . . . 5.9 2.4 146 Life and financial solutions 59.7 61.5 (3) International. . . . . . . . 55.1 72.7 (24) ------ ------- $184.8 $221.0 16% ====== ======== Percentage of total revenues 64.1% 66.2% ------ -------
BPO BPO revenues increased $15.9 million for the first six months of 2000 compared with the first six months of 1999, with the following increases by business segment: property and casualty up 5% ($1.2 million); life insurance and financial solutions up 125% ($11.1 million) due to internal growth and the acquisition of FAS ($2.8 million) in 1999; and international up $3.6 million due to increased processing in Europe and South Africa. The claims segment has no BPO operations. Set forth below is a comparison BPO revenue by segment for the periods ending June 30, 2000 and 1999, respectively:
Six months Ended June 30, ---------------- 2000 1999 Change ----- ----- ------ (Dollars in millions) Property and casualty. . . . $ 24.0 $22.8 5% Claims . . . . . . . . . . . - - - Life and financial solutions 20.0 8.9 125 International. . . . . . . . 4.1 0.5 720 ------ ------ $ 48.1 $32.2 49% ====== ====== Percentage of total revenues 16.7% 9.6% ------ -------
OPERATING EXPENSES COST OF REVENUES Employee compensation and benefits increased 3% for the first six months of 2000 compared with the first six months of 1999, due primarily to the acquisitions in 1999 (see Note 2 of Notes to Consolidated Financial Statements) partially offset by the reductions in force. Before the effect of these acquisitions employee compensation and benefits for the first six months of 2000 decreased 3% when compared with the first six months of 1999. Domestic employee compensation in the first six months of 2000 increased 9% ($9.2 million) compared with the first six months of 1999 with the effects of reductions in force in prior quarters being offset by acquisitions in 1999 and an increase in benefit expense due to the acceleration of health claims paid 29 as a result of the reduction in force. International compensation and benefits decreased 10% ($4.7 million) reflecting the benefit of 1999 third quarter and 2000 first quarter reductions in force. Computer and communications expenses increased 16% for the first six months of 2000 compared with the first six months of 1999. The increase is due to the Company's 1999 acquisitions, an increase in processing volumes and data center operating software license fees. Depreciation and amortization of property, equipment and capitalized software costs increased 12% for the first six months of 2000 compared with the first six months of 1999. Depreciation and amortization was reduced as a result of software write-downs recorded in the 1999 third and fourth quarters and a reduction in the Company's capital expenditures for property and equipment. However, these savings were more than offset by the 2000 second quarter software write-offs (see Note 5 of Notes to Consolidated Financial Statements) discussed below and the acquisitions of Dorn and FAS in 1999. Other operating costs and expenses increased 31% for the first six months of 2000 compared with the first six months of 1999. This increase was due to the Company's acquisitions in 1999 being partially off-set by a decrease in the amount of development expense capitalized related to internal software development and internally used systems. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased 2% for the first six months of 2000 compared with the first six months of 1999. Before the effects of the Company's 1999 acquisitions and approximately $2.1 million of brand expenses associated with changing the Company's name (see Note 7 of Notes to the Consolidated Financial Statements regarding Change of Company's Name) selling, general and administrative expenses decreased 8% due partly to the reduction in force and decreased costs associated with the Company's lower revenues in the first six months of 2000. Selling, general and administrative expenses increased to 17% of revenues in the first six months of 2000 compared to 16% for the first six months of 1999. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES Amortization of goodwill and other intangibles increased 10% for the first six months of 2000 compared with the first six months of 1999, principally due to increased amortization related to the Company's 1999 acquisitions. RESTRUCTURING AND OTHER CHARGES Restructuring and other charges include approximately $8.7 million of cash charges paid or to be paid as a result of initiatives taken by the Company in the first six months of 2000 for a worldwide reduction in force of 350 employees in the first quarter and a reduction in force in the international segment of 37 employees in the second quarter. An additional $7.3 million relates to a settlement of a dispute with a customer and legal expenses associated with the CSC and shareholder lawsuits (see Note 3 of Notes to Consolidated Financial Statements). 30 MERGER TERMINATION CHARGES Merger termination charges include a $19.0 termination fee and $5.3 million of accrued WCAS and Company expenses resulting from the Company's termination of the WCAS merger (see Note 6 of Notes to Consolidated Financial Statements). OPERATING (LOSS) INCOME The 2000 six month results produced an operating loss of $55.2 million compared with the 1999 six month operating income of $49.6 million. The 2000 six month operating loss includes Special Charges of $57.4 million (see Note 5 of the Notes to the Consolidated Financial Statements). Before these special charges, the 2000 six month resulted in operating income of $2.2 million compared with operating income of $48.9 million in the 1999 six months. The remaining $46.7 million decrease relates primarily to a $25.7 million decline in initial license revenue and declining services revenue and margins. Set forth below is a comparison of operating income (loss) by segment for the periods ending June 30, 2000 and 1999, respectively:
Six Months OPERATING INCOME (LOSS) Ended June 30, ---------------- 2000 1999 Change ----- ----- ------ (Dollars in millions) Property and casualty. . . . $ 9.4 $37.2 (75)% Claims . . . . . . . . . . . (3.0) 5.6 (154) Life and financial solutions (2.5) 18.8 (113) Corporate. . . . . . . . . . (55.9) (16.2) (245) International. . . . . . . . (3.2) 4.2 (176) ---------------- $(55.2) $49.6 (211)% ======= ======= ======
Property and casualty segment operating income decreased $27.8 million or 75% primarily due to a $15.4 million decrease in initial license charges accompanied by a $20.3 million or 24% decrease in professional services & ITO revenue. Claims segment operating income decreased $8.6 million to a loss of $3.0 million principally due to a $2.6 million decrease in initial license charges and higher operating costs due to 1999 acquisitions. Life segment operating income decreased $21.3 million to a loss of $2.5 million principally due to Banking division losses of $8.4 million and lower initial license charges of $3.7 million. International segment operating income decreased $7.4 million to a loss of $3.2 million primarily due to special charges of $9.4 million described above, a $4.0 million decrease in initial license charges and lower professional services & ITO revenue. 31 Not withstanding the Company's reduction in force, the reduction in expense lagged behind the decline in revenues resulting in lower margins in its property and casualty, life and international segments. A significant portion of both the Company's revenues and its operating income is derived from initial licensing agreements received as part of the Company's software licensing activities. Because a substantial portion of initial licensing revenues are recorded at the time new systems are licensed, there can be significant fluctuations from quarter to quarter in 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 increasing rate of change in the insurance and banking industries coupled with the rapid evolution of eCommerce technology and the volatility of initial license revenues, as illustrated by the above table, is leading the Company to consider new business models that place less emphasis on initial license revenue and place more emphasis on transaction based revenue. The Company expects this transition to occur gradually over the next several years and will likely affect the amount and timing of revenue recognized in the Company's financial statements. The Company believes that during the second quarter, uncertainty concerning the Company's future ownership, including the proposed merger with CSC, adversely affected customers' decisions to license software from the Company. Management anticipates that this adverse effect will continue until the uncertainty is resolved. OTHER INCOME AND EXPENSE Investment income includes $5.3 million of gain on sale of investments. Interest expense and other charges is comprised primarily of interest expense which increased $9.2 million for the first six months of 2000 compared with the first six months of 1999, principally due to higher interest rates on higher levels of borrowed funds under the Company's credit agreements. The remainder of the increase is due to $2.1 million of amortization expense for credit facilities fees paid in the 2000 first quarter to amend the Company's credit agreements. The nominal interest rate applicable to borrowings under the Company's credit facility during the first six months of 2000 ranged from 7.375% to 9.6% compared to a range of 5.1625% to 5.85% for the same period in 1999. INCOME TAXES The effective income tax rate (income taxes expressed as a percentage of pre-tax income) was 11.1% and 37.0% for the first six months of 2000 and 1999, respectively. The effective rate for the six months ended June 30, 2000 is not comparable to the six months ended June 30, 1999 due primarily to non-tax effected merger related costs incurred during the first half of 2000 and the establishment of a valuation allowance for certain deferred tax assets. The valuation allowance was established due to the uncertain realization of those assets in light of the Company's operating performance. 32 LIQUIDITY AND CAPITAL RESOURCES
June 30, December 31, 2000 1999 ----------------------------------------------------------- (Dollars in millions) Cash and equivalents and marketable securities. . . . . . . . . . . . $ 20.6 $ 17.8 Current assets. . . . . . . . . . . 201.2 212.0 Current liabilities . . . . . . . . 337.4 76.0 Working capital . . . . . . . . . . (136.2) 136.0 Long-term debt. . . . . . . . . . . 0.0 227.0
Six Months Ended June 30, 2000 1999 -------------------------------------------------------- (Dollars in millions) Cash (used) provided by operations. . $ (1.3) $ 33.5 Cash used by investing activities . . (20.9) (120.9) Cash provided by financing activities 25.0 94.3
The Company's total debt, net of cash and marketable securities, at June 30, 2000 was $238.4 million, an increase from the comparable amount ($205.0 million) at March 31, 2000 which resulted primarily from the termination fees related to the WCAS transaction. Historically, the Company has used cash from operations for the development and acquisition of new products, capital expenditures, acquisition of businesses and repurchases of the Company's stock. For the second quarter of 2000, compared with the second quarter of 1999 however, the Company significantly decreased expenditures in all these areas and expects these expenditures during 2000 to continue at amounts lower than 1999. As of June 30, 2000, the Company had a $180.0 million line of credit of which $168.0 million was outstanding. Availability under this credit line will be reduced to $125 million on April 1, 2001 and will expire on July 1, 2001. The Company's $70.0 million term loan, all of which was outstanding at June 30, 2000, matures on January 31, 2001. In addition, CSC advanced to the Company the cash necessary to pay the $19.0 million termination fee due to WCAS upon the termination of the WCAS merger agreement, and committed to advance up to $5.0 million for related expenses. The amount of these expenses are yet to be agreed but are expected to be paid in the 2000 third quarter. CSC also provided the Company a line of credit up to $30.0 million for operational working capital needs. Any amounts due CSC mature on July 3, 2001. Since all of the Company's debt matures on or before July 3, 2001 and in light of the issues concerning the Company's ability to meet its financial covenants, more fully discussed below, all of the Company's indebtedness is shown under current liabilities in the accompanying balance sheet as of June 30, 2000. 33 The results for the quarter ended June 30, 2000 resulted in a violation of the defined Consolidated Adjusted Cash Flow covenant of both the $180.0 million line of credit and $70.0 million term loan agreements as amended in April, 2000. Consequently, the Company entered into an amendment in August, 2000, which brought it into compliance with its agreements. That amendment provides for the exclusion from the Consolidated Adjusted Cash Flow and Consolidated Minimum Tangible Net Worth covenants of up to $24.0 million in fees and expenses due WCAS. In addition, the amendment reduced the required minimum amount of Consolidated Adjusted Cash Flow for the quarter ended June 30, 2000 from $15.0 million to $10.0 million, but did not amend the required minimum amount for the quarter ended September 30, 2000 which is $30.0 million. The amendment left unchanged the required level of Minimum Consolidated Tangible Net Worth as at September 30, 2000, which is $196.7 million Future credit availability under the Company's amended credit agreements is dependent upon the Company achieving improvements in its operating performance. In light of the uncertainties surrounding future performance and the Company's current debt position, the Company is exploring alternative means to reduce its debt, some of which would be subject to approval by CSC. Significant expenditures anticipated for the remainder of 2000, excluding new product development are as follows: acquisition of data processing and communications equipment, support software, office furniture, fixtures and equipment ($10.0 million) and costs relating to the continued enhancement of existing software products ($20.0 million). FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's operating results and financial condition may be impacted by a number of factors, including, but not limited to, the following, any of which could cause actual results to vary materially from current and historical results or the Company's anticipated future results. Currently, the Company's business is focused principally within the global property and casualty and life and financial services industries. Significant changes in the regulatory or market environment of these industries could impact demand for the Company's software products and services. Additionally, there is significant competition for the Company's products and services, and there can be no assurance that the Company's current products and services will remain competitive, or that the Company's development efforts will produce products with the cost and performance characteristics necessary to remain competitive. Furthermore, the market for the Company's products and services is characterized by rapid changes in technology and the emergence of the Internet as a viable insurance distribution channel. The Company's success will depend on the level of market acceptance of the Company's products, technologies and enhancements, and its ability to introduce such products, technologies and enhancements to the market on a timely and cost effective basis, and maintain a labor force sufficiently skilled to compete in the current environment. 34 Contracts with governmental agencies involve a variety of special risks, including the risk of early contract termination by the governmental agency and changes associated with newly elected state administrations or newly appointed regulators. The timing and amount of the Company's revenues are subject to a number of factors, such as the timing of customers' decisions to enter into large license agreements with the Company, which make estimation of operating results prior to the end of a quarter or year extremely uncertain. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Amounts affected by these estimates include, but are not limited to, the estimated useful lives, related amortization expense and carrying values of the Company's intangible assets and the net realizable value of capitalized software development costs and accrued reserves established for contingencies such as litigation and restructuring activities. Changes in the status of certain matters or facts or circumstances underlying these estimates could result in material changes to these estimates, and actual results could differ from these estimates. A significant portion of both the Company's revenues and its operating income is derived from initial licensing agreements received as part of the Company's software licensing activities. Because a substantial portion of these revenues are recorded at the time systems are licensed, there can be significant fluctuations from quarter-to-quarter and year-to-year in the revenues and operating income derived from licensing activities. This is attributable principally to the timing of customers' decisions to enter into license agreements with the Company, which the Company is unable to control. The Company believes that during the second quarter, uncertainty concerning the Company's future ownership, including the proposed merger with CSC, adversely affected customers' decisions to license software from the Company. Management anticipates that this adverse effect will continue until the uncertainty is resolved. 35 The Year 2000 has caused an unprecedented level of investment in systems and remediation services that may adversely affect customers' decisions to invest in new application software. In addition, the Company believes that system evaluations and decision processes are being affected by uncertainties related to the Internet and its emergence as a viable insurance distribution channel is causing a re-evaluation of the traditional methods of distribution for insurance products. The Company also believes that in order for insurance companies to capitalize on this new distribution method they will be required to redesign their business models and related support systems. The issues raised by the emergence of the Internet and related technology requirements will be distracting and confusing for many insurance companies and complicate the process of transitioning the insurance industry to modern architecture. Therefore, customer uncertainty as to their Internet and enterprise business strategies may extend sales cycles for large enterprise systems. The above factors limit the Company's ability to accurately predict licensing and services demand. Because of the foregoing factors, as well as other factors affecting the Company's operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Statements in this report that are not descriptions of historical facts may be forward-looking statements that are subject to risks and uncertainties, including economic, competitive and technological factors affecting the Company's operations, markets, products, services and prices, as well as other specific factors discussed above and in the Company's filings with the Securities and Exchange Commission. These and other factors may cause actual results to differ materially from those anticipated. 36 PART II OTHER INFORMATION POLICY MANAGEMENT SYSTEMS CORPORATION ITEM 1. LEGAL PROCEEDINGS See Note 3, Contingencies, of Notes to Consolidated Financial Statements, which is incorporated by reference in this Item. ITEMS 2, 3, 4 AND 5 are not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. Exhibits Exhibits required to be filed with this Quarterly Report on Form 10-Q are listed in the following Exhibit Index. The Company did not file any reports on Form 8-K during the quarter ended June 30, 2000. 37 POLICY MANAGEMENT SYSTEMS CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. POLICY MANAGEMENT SYSTEMS CORPORATION ------------------------------------- (Registrant) Date: August 14, 2000 Timothy V. Williams Executive Vice President (Chief Financial Officer) 38 POLICY MANAGEMENT SYSTEMS CORPORATION EXHIBIT INDEX TO FORM 10-Q FOR QUARTER ENDED JUNE 30, 2000 Exhibit ------- Number ------ 2. PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION A. Agreement and Plan of Merger between Politic Acquisition Corporation and Policy Management Systems Corporation dated March 30, 2000 (filed as an exhibit to Form 8-K dated March 30, 2000 and is incorporated herein by reference) B. Amended and Restated Agreement and Plan of Merger between Politic Acquisition Corporation and Policy Management Systems Corporation dated as of April 27, 2000 (filed as an exhibit to Form S-4, Registration Statement, dated April 29, 2000 and is incorporated herein by reference) C. Agreement and Plan of Merger among Computer Sciences Corporation, Patriot Acquisition Corporation and Policy Management Systems Corporation dated June 20, 2000 (filed as an exhibit to Schedule 14-D9/A dated July 19, 2000 and is incorporated herein by reference) 3. ARTICLES OF INCORPORATION AND BY-LAWS A. Bylaws of the Company, as amended through September 2, 1999 incorporating all amendments thereto subsequent to July 19, 1994 (filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1999, 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) 39 10. MATERIAL CONTRACTS A. Conformed copy of Development and Marketing Agreement between International Business Machines Corporation and Policy Management Systems Corporation, dated July 26, 1989 (File No. 0-10175 - filed under cover of Form SE filed on September 29, 1989, and is incorporated herein by reference) B. Policy Management Systems Corporation 1989 Stock Option Plan (File No. 0-10175 - filed under cover of Form SE on March 22, 1991, and is incorporated herein by reference) C. Deferred Compensation Agreement with G. Larry Wilson (filed as an Exhibit to Form 10-K for the year ended December 31, 1993, and is incorporated herein by reference) D. Employment Agreement with Stephen G. Morrison (filed as an Exhibit to Form 10-Q for the quarter ended March 31, 1994, and is incorporated herein by reference) E. Stock Option/Non-Compete Agreement with Stephen G. Morrison (filed as an Exhibit to Form 10-Q for the quarter ended March 31, 1994, and is incorporated herein by reference) F. Employment Agreement with Timothy V. Williams (filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is incorporated herein by reference) G. Stock Option/Non-Compete Form Agreement for named executive officers together with schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1992, and is incorporated herein by reference) H. Stock Option/Non-Compete Form Agreement for named executive officers together with schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1994, and is incorporated herein by reference) I. Stock Option/Non-Compete Form Agreement for named executive officers together with schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is incorporated herein by reference) J. Policy Management Systems Corporation 1993 Long-Term Incentive Plan for Executives (filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is incorporated herein by reference) K. First Amendment to the Policy Management Systems Corporation 1989 Stock Option Plan (filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is incorporated herein by reference) L. Fourth Amendment to the Policy Management Systems Corporation 1989 Stock Option Plan (filed as an Exhibit to Form 10-Q for the quarter ending March 31, 1995, and is incorporated herein by reference) M. Second and Third Amendments to the Policy Management Systems Corporation 1989 Stock Option Plan (filed as an Exhibits and to Form 10-Q for the quarter ended June 30, 1995, and is incorporated herein by reference) 40 N. Stock Option/Non-Compete Form Agreement for named executive officers together with schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1995, and is incorporated herein by reference) O. Stock Option/Non-Compete Form Agreement for named executive officers together with schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-K for year ended December 31, 1995, and is incorporated herein by reference) P. Stock Option/Non-Compete Form Agreement for named executive officers together with schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-K for year ended December 31, 1995, and is incorporated herein by reference) Q. Stock Option/Non-Compete Agreement with Timothy V. Williams dated February 1, 1994 (filed as an Exhibit to Form 10-K for year ended December 31, 1995, and is incorporated herein by reference) R. Stock Option/Non-Compete Agreement with Timothy V. Williams dated May 10, 1995 (filed as an Exhibit to Form 10-K for year ended December 31, 1995, and is incorporated herein by reference) S. Registration Rights Agreement, dated March 8, 1996, between Policy Management Systems Corporation and Continental Casualty Company (filed as an Exhibit to Form 10-Q for the quarter ended March 31, 1996, and is incorporated herein by reference) T. Shareholders Agreement dated March 8, 1996 between Policy Management Systems Corporation and Continental Casualty Company (filed as an Exhibit to Form 10-Q for the quarter ended March 31, 1996, and is incorporated herein by reference) U. Stock Option/Non-Compete Form Agreement for named executive officers Together with schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1996, and is incorporated herein by reference) V. Employment Agreement Form dated November 7, 1996 for Messrs. Morrison and Williams together with a schedule identifying particulars for each executive officer (filed as an Exhibit to Form 10-K for year ended December 31, 1996 and is incorporated herein by reference) W. Stock Option/Non-Compete Agreement with Stephen G. Morrison dated October 22, 1996 (filed as an Exhibit to Form 10-K for year ended December 31, 1996 and is incorporated herein by reference) X. Stock Option/Non-Compete Form Agreement for named executive officers together with schedule identifying particulars for each executive officer (filed as an Exhibit to Form 10-Q for the quarter ended March 31, 1997 and is incorporated herein by reference) Y. Form of Amendment No. 1 to the Employment Agreements with Messrs. Morrison and Williams, together with schedule identifying particulars for each executive officer (filed as an Exhibit to Form 10-Q for Quarter ended June 30, 1997 and is incorporated herein by reference) 41 Z. Form of Employment Agreements with Messrs. Wilson and Bailey, together with schedule identifying particulars for each executive officer (filed as an Exhibit to Form 10-Q for Quarter ending September 30, 1997 and is incorporated herein by reference) AA. Credit Agreement dated as of August 8, 1997 among Policy Management Systems Corporation, the Guarantors Party hereto, Bank of America National Trust and Savings Association and the Other Financial Institution Party Hereto (filed as an Exhibit to Form 10-Q for Quarter ending September 30, 1997 and is incorporated herein by reference) BB. Stock Option/Non-Compete Form Agreement for named executive officers together with schedule identifying particulars for each named executive officer (filed as an Exhibit to the Form 10-Q for the quarter ended March 31, 1998, and is incorporated herein by reference) CC. Policy Management Systems Corporation Restricted Stock Ownership Plan (filed as an Exhibit to Form 10-Q for Quarter ended September 30, 1998 and is incorporated herein by reference) DD. Form of Restricted Stock Award Agreement dated August 11, 1998 with Messrs. Berkeley, Feddersen, Palms, Sargent, Seibels and Trub (filed as an Exhibit to Form 10-Q for Quarter ended September 30, 1998 and is incorporated herein by reference) EE. Employment Agreement with Michael W. Risley dated February 23, 1999, effective November 10, 1998 (filed as an Exhibit to Form 10-K for the year ended December 31, 1998 and is incorporated herein by reference) FF. Form of Restricted Stock Award Agreement dated March 1, 1999 with Messrs. Berkeley, Feddersen, Palms, Sargent, Seibels and Trub (filed as an Exhibit to Form 10-Q for Quarter ending March 31, 1999 and is incorporated herein by reference) GG. Form of Restricted Stock Award Agreement for named executive officers together with schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-Q for Quarter ending March 31, 1999 and is incorporated herein by reference) HH. Stock Option/Non-Compete Form Agreement for named executive officers together with schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-Q for Quarter ending June 30, 1999 and is incorporated herein by reference) II. Stock Option/Non-Compete Form Agreement with Michael W. Risley dated May 11, 1999 (filed as an Exhibit to Form 10-Q for Quarter ending June 30, 1999 and is incorporated herein by reference) JJ. Form of 1999 Bonus Plan for named executive officers together with schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-Q for Quarter ending June 30, 1999 and is incorporated herein by reference) KK. Promissory Note dated July 21, 1999 between Policy Management Systems Corporation and First Union National Bank (filed as an Exhibit to Form 10-Q for Quarter ending September 30, 1999 and is incorporated herein by reference) 42 LL. Modification Number One dated October 15, 1999 to the Promissory Note between Policy Management Systems Corporation and First Union National Bank dated July 21, 1999 (filed as an exhibit to Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference) MM. Modification Number Two dated October 28, 1999 to the Promissory Note between Policy Management Systems Corporation and First Union National Bank dated July 21, 1999 (filed as an exhibit to Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference) NN. Stock Option/Non-Compete Form Agreement dated May 11, 1999 for named executive officers together with schedule identifying particulars for each named executive officer (filed as an exhibit to Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference) OO. Stock Option/Non-Compete Form Agreement dated August 9, 1999 with Mr. Harald J. Karlsen (filed as an exhibit to Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference) PP. Stock Option/Non-Compete Form Agreement dated November 8, 1999 for named executive officers together with schedule identifying particulars for each named executive officer (filed as an exhibit to Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference) QQ. Form of Restricted Stock Award Agreement dated February, 1999 for Mr. Michael D. Gantt (filed as an exhibit to Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference) RR. Change in Control Severance Pay Plan for Select Employees dated October 22, 1996 together with schedule identifying particulars for Michael D. Gantt and Harald J. Karlsen (filed as an exhibit to Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference) SS. Term Loan Agreement between Policy Management Systems Corporation, the Guarantors Party, Bank of America, N.A. and other financial institutions in the amount of $70 million dated November 5, 1999 (filed as an exhibit to Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference) 43 TT. Form of Restricted Stock Award Agreement dated March 1, 2000 with Messrs. Berkeley, Feddersen, Palms, Sargent and Trub with schedule identifying particulars for each named Director (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) The Schedule for TT contained the following: Named Director Number Granted --------------- --------------- Al Berkeley 1,491 Don Feddersen 1,491 John Palms 1,491 Joe Sargent 1,491 Richard Trub 1,491 UU. First Amendment to the Credit Agreement dated as of November 5,1999, between Policy Management Systems Corporation, Bank of America, N.A. and the other financial institutions thereto Director (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) VV. Second Amendment to the Credit Agreement dated as of February 10, 2000 between Policy Management Systems Corporation, Bank of America, N.A. and the other financial institutions thereto (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) WW. Third Amendment to the Credit Agreement dated as of March 30, 2000 between Policy Management Systems Corporation, Bank of America, N.A. and the other financial institutions thereto (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) XX. Fourth Amendment to the Credit Agreement dated as of April 24, 2000 between Policy Management Systems Corporation, Bank of America, N.A. and the other financial institutions thereto (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) YY. First Amendment to Term Loan Agreement dated as of February 10, 2000 between Policy Management Systems Corporation, Bank of America, N.A. and the other financial institutions thereto (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) ZZ. Second Amendment to Term Loan Agreement dated as of March 30, 2000 between Policy Management Systems Corporation, Bank of America, N.A. and the other financial institutions thereto (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) AAA. Third Amendment to Term Loan Agreement dated as of April 24, 2000 between Policy Management Systems Corporation, Bank of America, N.A. and the other financial institutions thereto (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) 44 BBB. Security Agreement dated as of April 28, 2000, among Policy Management Systems Corporation, certain of its subsidiaries, and Bank of America, N.A., as Administrative Agent (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) CCC. Pledge Agreement dated as of April 28, 2000, between Policy Management Systems Corporation, certain of its subsidiaries, and Bank of America, N.A., as Administrative Agent (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) DDD. Mortgage Agreement dated as of April 28, 2000, between Policy Management Systems Corporation and Bank of America, N.A., as Administrative Agent (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) EEE. Form of Employee Stock Option/Non Compete Agreement dated April 3,2000 with schedule identifying particulars for each named officer (filed herewith) The Schedule for EEE [57] contained the following: OFFICERS OPTIONS RECEIVED -------- ----------------- David T. Bailey 35,000 Michael D. Gantt 35,000 Harald J. Karlsen 25,000 Stephen G. Morrison 35,000 Michael W. Risley 35,000 Timothy V. Williams 35,000 G. Larry Wilson 75,000 FFF. Form of Memorandum regarding Grant of 15,000 Stock Options dated April 5, 2000 with schedule identifying particulars for each director (filed herewith) The Schedule for FFF [58] contained the following: DIRECTORS --------- Alfred R. Berkeley, III Donald W. Feddersen Dr. John M. Palms Joseph D Sargent John P. Seibels Richard G. Trub GGG. Consent and Waiver dated June 19, 2000 relating to the Credit Agreement between Policy Management Systems Corporation, the Guarantors, Bank of America, N.A., and the other financial institutions thereto (filed herewith) HHH. Consent, Waiver and Amendment dated June 19, 2000 relating to the Term Loan Agreement between Policy Management Systems Corporation, the Guarantors, Bank of America, N.A., and the other financial institutions thereto (filed herewith) 45 III. Consent and Waiver dated June 20, 2000 relating to the Credit Agreement between Policy Management Systems Corporation, the Guarantors, Bank of America, N.A., and the other financial institutions thereto (filed herewith) JJJ. Consent and Waiver dated June 20, 2000 relating to the Term Loan Agreement between Policy Management Systems Corporation, the Guarantors, Bank of America, N.A., and the other financial institutions thereto (filed herewith) KKK. Consent, Waiver and Fifth Amendment to Credit Agreement dated July 14, 2000 between Policy Management Systems Corporation, the Guarantors, Bank of America, N.A., and the other financial institutions thereto (filed herewith) LLL. Consent and Waiver dated July 14, 2000 relating to the Term Loan Agreement between Policy Management Systems Corporation, the Guarantors, Bank of America, N.A., and the other financial institutions thereto (filed herewith) MMM. Fifth Amendment to Term Loan Agreement dated as of August ___, 2000 between Policy Management Systems Corporation, Bank of America, N.A., the Guarantors, and the other financial institutions thereto (filed herewith) NNN. Sixth Amendment to the Credit Agreement dated as of August __, 2000 between Policy Management Systems Corporation, Bank of America, N.A., the Guarantors, and the other financial institutions thereto (filed herewith) OOO. Subordination Agreement dated June 20, 2000 between Computer Sciences Corporation, Bank of America, N.A. and Policy Management Systems Corporation (filed herewith) PPP. Promissory Note dated June 20, 2000 by Policy Management Systems Corporation in favor of Computer Sciences Corporation (filed herewith) QQQ. Working Capital Promissory Note dated August 3, 2000 by Policy Management Systems Corporation in favor of Computer Sciences Corporation (filed herewith) 27. FINANCIAL DATA SCHEDULE A. Filed herewith 46