-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, d0vCEHg9roeCx5H8fFCOA9vLgfXoMvROrxZJAmO1+t9EjgecJSy++lMVMCPxS/rE jRicu0Hc3mjGHR5/oLTXrw== 0000356226-94-000016.txt : 19941103 0000356226-94-000016.hdr.sgml : 19941103 ACCESSION NUMBER: 0000356226-94-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941101 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLICY MANAGEMENT SYSTEMS CORP CENTRAL INDEX KEY: 0000356226 STANDARD INDUSTRIAL CLASSIFICATION: 6411 IRS NUMBER: 570723125 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10557 FILM NUMBER: 94557009 BUSINESS ADDRESS: STREET 1: ONE PMS CTR STREET 2: PO BOX TEN CITY: COLUMBIA STATE: SC ZIP: 29202 BUSINESS PHONE: 8037354000 10-Q 1 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 1994 Commission file number 0-10175 POLICY MANAGEMENT SYSTEMS CORPORATION (Exact name of registrant as specified in its charter) South Carolina 57-0723125 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) One PMS Center (P.O. Box Ten) Blythewood, S.C. (Columbia, S.C.) 29016 (29202) (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code (803) 735-4000 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 No X Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 19,419,584 Common shares, $.01 par value, as of September 30, 1994 The information furnished herein reflects all adjustments which are, in the opinion of management, necessary for the fair presentation of the results for the periods reported. Such information should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1993. 2 POLICY MANAGEMENT SYSTEMS CORPORATION INDEX PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Statements of Operations for the three and nine months ended September 30, 1994 and 1993..................................... 3 Consolidated Balance Sheets as of September 30, 1994 and December 31, 1993.......... 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 1994 and 1993. 5 Notes to Consolidated Financial Statements.......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings...................................23 Item 6. Exhibits and Reports on Form 8-K....................23 Signatures....................................................24 3 PART I FINANCIAL INFORMATION POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Nine Months Ended September 30, Ended September 30, 1994 1993 1994 1993 (Unaudited) (Unaudited) (Note 1) (In Thousands, Except Per Share Data) Revenues: Licensing.......................... $ 27,027 $ 15,666 $ 67,018 $ 58,621 Services........................... 99,966 93,219 300,658 286,187 126,993 108,885 367,676 344,808 Costs and Expenses: Employee compensation & benefits... 43,656 42,038 133,498 126,293 Computer and communications expenses......................... 11,602 10,095 34,314 31,016 Information services and data acquisition costs........... 33,039 34,281 100,865 96,300 Other operating costs & expenses... 25,816 21,719 66,347 91,862 Impairment and restructuring charges (credits)................ (1,746) - (3,461) 80,733 112,367 108,133 331,563 426,204 Operating income (loss).............. 14,626 752 36,113 (81,396) Other Income and Expenses: Investment income.................. 1,282 2,237 4,954 7,941 Gain/(loss) on sale of marketable securities....................... (1,010) 19 (1,829) 3,052 Interest expense and other charges.......................... (605) (923) (2,324) (1,719) (333) 1,333 801 9,274 Income (loss) before income tax (benefit).......................... 14,293 2,085 36,914 (72,122) Income taxes (benefit)............... 4,570 1,739 13,025 (12,045) Net income (loss).................... $ 9,723 $ 346 $ 23,889 $ (60,077) Net income (loss) per share.......... $ .49 $ .02 $ 1.12 $ ( 2.62) Weighted average number of shares.... 19,975 22,604 21,360 22,933 See accompanying notes. 4 POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited) September 30, December 31, 1994 1993 (In Thousands, Except Share Data) Assets Current assets: Cash and equivalents................................... $ 17,153 $ 24,122 Marketable securities.................................. 45,932 132,650 Receivables, net of allowance for uncollectible amounts of $1,996 ($1,817 at 1993).................. 101,674 92,975 Income tax receivable.................................. 18,337 18,764 Deferred income taxes.................................. 9,046 9,491 Other.................................................. 9,550 9,735 Total current assets................................ 201,692 287,737 Property and equipment, at cost less accumulated depreciation and amortization of $121,073 ($102,623 at 1993).................................. 131,870 139,029 Receivables.............................................. 582 4,716 Goodwill and other intangible assets..................... 77,975 85,969 Capitalized software costs............................... 127,678 117,513 Deferred income taxes.................................... - 21,585 Investments.............................................. 7,663 - Other.................................................... 5,019 3,254 Total assets..................................... $552,479 $659,803 Liabilities Current liabilities: Accounts payable and accrued expenses.................. $ 39,721 $ 42,256 Accrued restructuring charges.......................... 5,441 9,521 Accrued contract termination costs..................... 1,580 2,714 Current portion of long-term debt...................... 4,114 6,986 Unearned revenues...................................... 15,710 19,121 Other.................................................. 317 383 Total current liabilities........................... 66,883 80,981 Long-term debt........................................... 4,477 5,655 Deferred income taxes.................................... 54,681 74,151 Accrued restructuring charges............................ 12,631 19,735 Other.................................................... 1,361 2,309 Total liabilities................................... 140,033 182,831 Commitments and contingencies (Note 3) Stockholders' Equity Special stock, $.01 par value, 5,000,000 shares authorized............................................ - - Common stock, $.01 par value, 75,000,000 shares authorized, 19,419,584 shares issued and outstanding (22,637,021 at 1993)...................... 194 226 Additional paid-in capital............................... 172,648 262,167 Retained earnings........................................ 240,521 216,632 Unrealized holding gain on marketable securities......... 19 - Foreign currency translation adjustment.................. (936) (2,053) Total stockholders' equity.......................... 412,446 476,972 Total liabilities and stockholders' equity....... $552,479 $659,803 See accompanying notes.
5 POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, 1994 1993 Operating Activities (In Thousands) Net income/(loss)............................... $ 23,889 $(60,077) Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Depreciation and amortization................. 50,413 47,214 Deferred income taxes......................... 2,560 (20,763) Loss/(gain) on sale of marketable securities.................................. 1,829 (3,053) Provision for uncollectible accounts.......... 730 1,500 Impairment charges............................ - 54,890 Changes in assets and liabilities: Accrued restructuring and lease termination costs........................... (10,436) 25,843 Receivables................................... (5,295) 21,344 Income taxes receivable....................... 427 (7,341) Accounts payable and accrued expenses......... (2,535) 1,822 Income taxes payable.......................... - 3,009 Other, net...................................... (4,852) (3,848) Cash provided by operations................ 56,730 60,540 Investing Activities Proceeds from sales/maturities of marketable securities..................................... 225,840 364,443 Purchases of marketable securities.............. (153,033) (269,112) Acquisition of property and equipment........... (14,514) (35,242) Capitalized internal software development costs.......................................... (25,914) (17,591) Purchased software.............................. (418) (3,928) Proceeds from disposal of property and equipment...................................... (437) 9,123 Business acquisitions........................... - (59,097) Cash provided (used) by investing activities............................... 31,524 (11,404) Financing Activities Payments on long-term debt...................... (4,599) (3,680) Issuance of common stock under stock option plans.................................. - 690 Issuance of common stock to employee benefit plan.................................. - 1,328 Repurchase of common stock...................... (89,551) (48,660) Cash used for financing activities......... (94,150) (50,322) Effect of exchange rate changes on cash........... (1,073) 519 Net decrease in cash and equivalents.............. (6,969) (667) Cash and equivalents at beginning of period....... 24,122 31,959 Cash and equivalents at end of period............. $ 17,153 $ 31,292 Noncash Activities Long-term debt arising from and assumed in connection with business acquisition........... $ - $ 4,187 Supplemental Information Interest paid................................... 1,719 1,037 Income taxes paid............................... 10,126 12,158 See accompanying notes. 6 POLICY MANAGEMENT SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1994 NOTE 1. RESTATEMENT OF PRIOR YEAR RESULTS OF OPERATIONS In August 1993, the Company engaged independent accountants to conduct a special audit of the Company's balance sheet as of December 31, 1992 and its consolidated financial statements as of and for the six months ended June 30, 1993. As a result of this audit, the Company determined that retained earnings previously reported as of December 31, 1992 required adjustment. These adjustments were due to errors in the application of accounting principles and subsequent discovery of facts existing at February 26, 1993, the date of the predecessor auditor's report (see Note 2 of Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 1993). The Company has determined the specific prior periods affected by these adjustments, has restated its financial statements for such periods and intends to file amended annual and quarterly reports on Forms 10-K and 10-Q for the years 1993 and 1992. NOTE 2. MARKETABLE SECURITIES Effective January 1, 1994, the Company adopted the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," ("FAS 115"). In accordance with the provisions of FAS 115, the Company has classified debt securities (principally municipal bonds) either as available-for-sale, which are carried at fair market value and shown as Marketable Securities, or as held-to-maturity, which are carried at amortized cost and shown as Investments. Unrealized gains and losses on securities classified as available-for-sale are reported net and are included in Stockholders' Equity. NOTE 3. CONTINGENCIES In April 1993, litigation was commenced against the Company and certain of its present and former officers and directors in the United States District Court for the District of South Carolina, Columbia Division. In the litigation, which is a class action on behalf of purchasers of the Company's common stock between March 18, 1992 and July 8, 1993, the plaintiffs allege that the Company failed to prepare its financial statements in accordance with generally accepted accounting principles and omitted to disclose certain information regarding, among other things, its business and prospects in violation of the Federal securities laws, the South Carolina Code and common law. The Company believes it has meritorious defenses to the claims and is vigorously defending the litigation. The plaintiffs seek unspecified compensatory damages, legal fees and litigation costs. The Company is unable to predict the outcome or the potential financial impact of this litigation. As of September 30, 1994, the Company has recorded a claim for recovery of litigation costs related to this matter of $10.6 million, which is included in current receivables on 7 the Company's consolidated balance sheet. The maximum insurance coverage related to these claims is $15 million under the directors' and officers' insurance. In June 1993, the Securities and Exchange Commission ("SEC") commenced a formal investigation into possible violations of the Federal securities laws in connection with the Company's public reports and financial statements, as well as trading in the Company's securities. The SEC has issued a formal order of investigation which provides the SEC staff with the power to subpoena documents and to compel testimony in connection with their investigation. The Company is cooperating with the SEC in connection with the investigation. In addition to the litigation noted above, the Company is presently involved in litigation and a contract dispute arising out of the Company's change in the direction of its future life software systems development following the acquisition of CYBERTEK. There are also various other litigation proceedings and claims arising in the ordinary course of business. The Company believes it has meritorious defenses and is vigorously defending these matters. While the resolution of these matters could affect the results of operations in future periods, the Company does not expect these matters to have a material adverse effect on its consolidated financial position. However, the Company is unable to predict the ultimate outcome or the potential financial impact of these matters. NOTE 4. INCOME TAXES On September 29, 1994, the Company reached a tentative agreement with the Internal Revenue Service ("IRS") regarding proposed tax deficiencies relating to an examination of the Company's consolidated federal income tax returns. The tentative settlement, which includes a current payment of $3.9 million and a liability for further taxes in future periods, resolves all issues related to the IRS's examination of the Company's tax returns for the years 1985 through 1990. The tentative settlement is also less than the related amounts included in the income tax liability accounts of the Company. This formal acceptance is expected within the next several weeks in the form of a closing letter. Upon execution of the closing letter, amounts previously established as liabilities in excess of the settlement amount will be accounted for as reductions of tax expense in the period that such closing letter is received. NOTE 5. IMPAIRMENT AND RESTRUCTURING The Company recorded, at June 30, 1993, impairment charges to reduce the carrying value of certain identifiable intangible assets and goodwill related to its health insurance services business of $54.9 million and restructuring charges of $25.2 million associated with employee severance and outplacement ($5.2 million), and to an ongoing lease obligation and/or termination for the planned future abandonment of certain leased office facilities ($20.0 million) (see Note 13 of Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 1993). Due to a 8 change in its estimates, as of September 30, 1994, the Company has reduced its restructuring reserves by $3.5 million, $1.7 million of which resulted from a change in the scheduled downsizing of the Company's health staff and a corresponding reduction in amounts established for severance and outplacement costs, recorded in June 1994, and $1.8 million of which resulted from a lease termination at amounts less than those established for the planned future abandonment of certain leased office facilities, recorded in July 1994. NOTE 6. OTHER MATTERS In July 1994, the Company received a decision from an international arbitration tribunal relating to a contract termination dispute, finding that both parties were responsible. The Company has made provision (at June 1994) for satisfaction of the award in the amount of $1.9 million. The Company announced on April 27, 1994, that it had agreed with IBM to repurchase 2,278,537 of the 3,797,561 shares of the Company's common stock held by IBM and that the remainder of the Company's shares owned by IBM would be purchased by the General Atlantic Partners group, a New York-based private investment firm. The Company completed the repurchase of these shares on May 16, 1994, at a share price of $24.71, which approximated an aggregate cash expenditure of $56.3 million. The shares repurchased by the Company represent 10% of its total shares outstanding prior to the repurchase. Pursuant to a stock repurchase program approved by the Board of Directors in July 1994, the Company may purchase from time to time up to 2.5 million shares of its issued and outstanding common stock. This program is flexible as to the timing and method of acquisition of these shares. As of September 30, 1994, the Company had repurchased, on the open market, 938,900 shares of its common stock, at an average price of approximately $35.00 per share for a total of $33.0 million. 9 POLICY MANAGEMENT SYSTEMS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto contained in Part I of this report on Form 10-Q and with the Company's Annual Report on Form 10-K for the year ended December 31, 1993. 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:
1994 vs 1993 Percent Increase (Decrease) Percentage Percentage Three Nine of Revenues of Revenues Months Months Three Months Nine Months Ended Ended Ended September 30, Ended September 30, September 30, 1994 1993 1994 1993 Revenues: Licensing................. 21.3 14.4 18.2 17.0 72.5 14.3 Services.................. 78.7 85.6 81.8 83.0 7.2 5.1 100.0 100.0 100.0 100.0 16.6 6.6 Costs and Expenses: Employee compensation and benefits.......... 34.4 38.6 36.3 36.6 3.8 5.7 Computer & communication expense............... 9.1 9.3 9.3 9.0 14.9 10.6 Information services & data acquisition costs..... 26.0 31.5 27.4 27.9 (3.6) 4.7 Other operating costs and expenses.......... 20.3 19.9 18.1 26.7 18.9 (27.8) Impairment and restructuring charges (credits)..... (1.3) - (.9) 23.4 (100.0) (104.3) 88.5 99.3 90.2 123.6 3.9 (22.2) Operating income (loss)... 11.5 .7 9.8 (23.6) 1,844.9 144.4 Other income and expenses. (.3) 1.2 .2 2.7 (125.0) (91.4) Income (loss) before income tax (benefit)......... 11.2 1.9 10.0 (20.9) 585.5 151.2 Income taxes (benefit).... 3.6 1.6 3.5 (3.5) 162.8 208.1 Net income (loss)......... 7.6 .3 6.5 (17.4) 2,710.1 139.8
10 THREE MONTHS COMPARISON A comparison of revenues and operating income for each line of business and geographic market for the periods presented is as follows:
Operating Operating Income as a Revenues Income % of Revenue Three Months Three Months Three Months Ended September 30, Ended September 30, Ended September 30, 1994 1993 1994 1993 1994 1993 (Dollars in Millions) Line of Business Property & Casualty $ 88.2 $ 80.2 $10.1 $ 6.5 11.5 8.1 Life 29.8 21.4 3.9 (1.1) 13.1 (5.1) Health 8.9 7.3 3.4 (4.3) 38.2 (58.9) Geographic Market United States $110.7 $ 95.3 $15.3 $(1.3) 13.8 (1.4) International 16.2 13.6 2.1 2.4 13.0 17.6
The above table does not include an allocation of revenues and costs associated with corporate activities such as equipment sales, financial services, legal and other general corporate activities. There were no equipment sales during the three months ended September 30, 1994 or 1993. Costs associated with these corporate activities amounted to $2.8 million and $.3 million, excluding special charges, for the three months ended September 30, 1994 and 1993, respectively (see Costs and Expenses below). Revenues Total licensing revenues for the three months ended September 30, 1994 increased $11.4 million (72.5%) compared to the corresponding period in 1993, due primarily to a $10.9 million increase in initial license revenues attributable to new systems licensed by both property and casualty and life insurers and by increased revenues from continuing monthly license charges for maintenance, enhancements and services availability ("MESA") and for continuing right-to-use licenses of $.5 million (3.7%). As part of the increase in initial license revenues, the Company executed a license agreement expansion with a large Blue Cross Blue Shield organization, which resulted in the recognition of $3.5 million in revenue for the Company's health insurance systems business. However, the Company does not expect to see recurring transactions of this size in the near term as health insurers, for the most part, are still reluctant to make major systems decisions. Total services revenues for the three months ended September 30, 1994 increased $6.7 million (7.2%) compared to the corresponding period in 1993. The total services revenue increase was affected by activities in professional, outsourcing and information services, as described more fully below. 11 Revenues from professional services increased $2.9 million (17.9%) to $19.3 million for the three months ended September 30, 1994 from $16.4 million for the corresponding period in 1993, due primarily to additional services ($4.4 million) generated by the life insurance services business. This increase was partially offset by a reduction in professional services ($1.4 million) provided by the Company's health insurance services business. Revenues from outsourcing services amounted to $32.3 million for the three months ended September 30, 1994, an increase of $6.2 million (23.5%) compared with the corresponding period in 1993. Revenues from outsourcing services increased $11.2 million as a result of new outsourcing services relating to life insurance services in Europe and servicing existing and new contracts with property and casualty insurance companies and residual markets. These increases were partially offset by the wind-down of the New Jersey Market Transition Facility (MTF) project, where revenues from this property and casualty contract decreased from $2.9 million for the three months ended September 30, 1993 to $.5 million for the three months ended September 30, 1994, and to the termination of a facilities management and processing contract in September 1993, representing $2.7 million of life insurance services business in Europe for the three months ended September 30, 1993. Revenues from information services were $47.8 million for the three months ended September 30, 1994 as compared with $50.8 million for the corresponding period in 1993. This $3.0 million decrease is attributable to a decrease in business associated with automobile property and casualty information services and as a result of a sale of a small non-strategic division. These decreases, however, were partially offset by an increase in life and information services. Costs and Expenses Employee compensation and benefits increased $1.6 million for the three months ended September 30, 1994 compared with the corresponding period in 1993, primarily as a result of increased costs ($3.7 million) associated with the acquisition of CYBERTEK Corporation in August 1993, the acquisition of a data center, including its workforce, in Bergen, Norway and an increase in third party temporary services. The increase in costs associated with these acquisitions was partially offset by a reduction in compensation and other benefits ($2.1 million) resulting from a downsizing in the Company's health insurance services staff from 437 at June 30, 1993 to approximately 238 at September 30, 1994. These scheduled staff reductions are part of the Company's restructuring of its health business (see Note 5 of Notes to Consolidated Financial Statements). Computer and communications expenses increased $1.5 million for the three months ended September 30, 1994 compared with the corresponding period in 1993, primarily as a result of increased costs associated with the acquisition of CYBERTEK Corporation in August 1993, and the acquisition of a data center, including its workforce, in Bergen, Norway in December 1993. 12 Information services and data acquisition costs decreased $1.2 million for the three months ended September 30, 1994 compared with the corresponding period in 1993, due primarily to a decrease in the volume of state fees for motor vehicle reports, which is part of the Company's property and casualty information services business. Other operating costs and expenses for the three months ended September 30, 1994 increased $4.1 million when compared with the corresponding period in 1993. The increase is primarily attributable to increases in operating costs associated with providing total policy management outsourcing services for new customers. This increase was partially offset by an increase in amounts capitalized principally related to the internal development of the Company's life software systems. In July 1994 the Company, due to a change in its estimates, reduced its restructuring reserves by $1.8 million, which resulted from a lease termination at amounts less than those established for the planned future abandonment of certain leased office facilities (see Note 5 of Notes to Consolidated Financial Statements). Operating Income Operating income was $14.6 million for the three months ended September 30, 1994, compared with $.8 million for the corresponding period in 1993. This increase resulted primarily from an increase in initial license revenues for new systems licensed by both property and casualty and life insurers, an increase in life insurance services in Europe, an increase in professional and outsourcing services provided under existing and new contracts with property and casualty insurance companies and residual markets, and to a reduction in restructuring reserves. The Company's health insurance systems business continues to show some improvement. Revenues benefited from a significant license agreement expansion resulting in the recognition of $3.5 million in revenue. Additional improvements resulted from a reduction in operating costs associated with the reduction in amortization charges for certain identifiable intangible assets and goodwill, which were written-off at June 30, 1993, a reduction in rental expense related to lease terminations and compensation and other benefits costs through the downsizing of staff. The property and casualty insurance software and services business experienced a higher level of revenue primarily from increased licensing activities and outsourcing revenues related to total policy management services during the three months ended September 30, 1994 compared to the corresponding period of 1993. However, operating income declined from the second quarter of 1994 as a result of a decrease in information services business and additional costs associated with servicing new outsourcing customers. Although the Company has not been able to reduce its operating expenses, associated with the wind-down of the MTF project, as quickly 13 as the reduction in revenue from the MTF occurred, operating income from services provided under new outsourcing contracts with insurance companies and residual markets have started to replace operating income lost from the MTF project. Revenues for the three months ended September 30, 1994 increased $4.7 million compared with the corresponding period in 1993; however, margins will be reduced during the early phases of these contracts due to start-up costs. The information services businesses, which include property and casualty as well as life insurance information services, produced a net operating loss for the three months ended September 30, 1994 of $1.8 million. The property and casualty business unit produced an operating loss of $2.5 million while the life business unit produced operating income of $.7 million. These results were weaker than that reported for the third quarter of 1993 when the property and casualty business produced an operating loss of $.7 million and the life business produced operating income of $.7 million. The 1994 third quarter performance reflects a trend of weakening results that began earlier in the year and in property and casualty is reflective of increasing price competition and changing market conditions. The life business has been heavily impacted by the implementation of new systems and higher costs to acquire information. In response to the recent performance and changing market conditions, the Company has taken and is considering further near-term actions to improve the overall results from information services. These actions include management changes, realigning and consolidating field offices, reducing other expenses, refining and enhancing products and services and evaluating the recoverability and amortization periods of intangible assets acquired in information services business acquisitions. Additionally, the Company is pursuing a long-term strategy to direct more of its information services business into database products and life information services where margins are generally higher. The Company typically realizes a much lower gross margin from property and casualty information services than from software products and related services. In August 1993, the Company completed its acquisition of CYBERTEK Corporation. The Company continues to focus on integrating CYBERTEK's products with the Company's Series III applications and technology. The Company has also completed the combination of CYBERTEK with the Company's life insurance software and services organization to eliminate redundancies. Although ongoing expenses of the combination continued at a high level in the third quarter, total revenues and operating income for the Company's life business increased $8.4 million and $5.0 million for the three months ended September 30, 1994, respectively, compared with the corresponding period in 1993, due primarily to the CYBERTEK acquisition, the addition of a new outsourcing contract in Europe during December 1993, and to increased initial license revenues. Investment income decreased $1.0 million during the three months ended September 30, 1994, compared with the corresponding period in 1993, as a result of a lower level of investable funds resulting from large cash expenditures for the acquisition of CYBERTEK Corporation 14 ($59.7 million) in August 1993, the repurchase in May 1994 of 2,278,537 of the 3,797,561 shares of common stock held by IBM ($56.3 million), the repurchase of 938,900 shares of the Company's common stock, on the open market, ($33.0 million) under its 2.5 million share repurchase plan (see Note 6 of Notes to Consolidated Financial Statements). As part of the Company's repurchase of 938,900 shares of its outstanding common stock under its 2.5 million share repurchase plan, the Company liquidated a portion of its marketable securities portfolio. The Company incurred a loss on the sale of securities of approximately $1.0 million related directly to the repurchase during the third quarter of 1994 (see Note 6 of Notes to Consolidated Financial Statements). Interest expense and other charges decreased $.3 million for the three months ended September 30, 1994 compared with the corresponding period in 1993, primarily as a result of a decrease in the amortization of discounts associated with long-term restructuring liabilities recorded at June 30, 1993. These liabilities, which are part of restructuring charges established to recognize as a loss the planned future abandonment of certain facilities relating to the restructuring of the Company's health insurance services business, were reduced $1.8 million during the three months ended September 30, 1994 (see Note 5 of Notes to Consolidated Financial Statements). The effective income tax rate (income taxes expressed as a percentage of pre-tax income) was 32.0% and 83.0% for the three months ended September 30, 1994 and 1993, respectively. The decrease in the effective tax rate is due primarily to the impact of recording a one time charge in the three months ended September 30, 1993 related to the increase in the highest federal marginal income tax rate from 34% to 35%. Without the one time charge, the effective tax rate would have been 31.8% for the three months ended September 30, 1993. The effective income tax rate for the three months ended September 30, 1994 is lower than the preceding 1994 quarters, principally as a result of a reduction in state income taxes ($.4 million), which are based on gross income and capital of the Company. 15 NINE MONTHS COMPARISON A comparison of revenues and operating income for each line of business and geographic market for the periods presented is as follows:
Operating Operating Income as a Revenues Income % of Revenue Nine Months Nine Months Nine Months Ended September 30, Ended September 30, Ended September 30, 1994 1993 1994 1993 1994 1993 (Dollars in Millions) Line of Business Property & Casualty $256.0 $260.0 $30.8 $37.3 12.0 14.3 Life 86.9 55.1 7.0 (6.4) 8.1 (11.6) Health 24.7 25.9 6.1 (9.5) 24.7 (36.7) Geographic Market United States $317.2 $299.0 $38.7 $14.5 12.2 4.8 International 50.4 42.0 5.2 6.9 10.3 16.4 The above table does not include an allocation of revenues and costs associated with corporate activities such as equipment sales, financial services, legal and other general corporate activities. Revenues related to equipment sales amounted to $3.8 million for the nine months ended September 30, 1993. There were no equipment sales during the corresponding period of 1994. Costs associated with these corporate activities amounted to $7.8 million and $7.8 million, excluding special charges ($98.8 million in 1993), for the nine months ended September 30, 1994 and 1993, respectively (see Costs and Expenses below). Revenues Total licensing revenues for the nine months ended September 30, 1994 increased $8.4 million (14.3%) compared with the corresponding period in 1993, due primarily to a $4.8 million increase in initial license revenues attributable to new systems licensed by life insurers and to an expanded license agreement in the health insurance systems business. Additionally, revenues from continuing monthly license charges for maintenance, system enhancements and services availability ("MESA") and for continuing right-to-use licenses increased $3.6 million (10.1%). These increases were partially offset by a reduction in systems licensed primarily to the property and casualty business in the United States. Total services revenues for the nine months ended September 30, 1994 increased $14.5 million (4.2%) compared with the corresponding period in 1993. The total services revenue increase was primarily affected by activities in professional, outsourcing and information services, as described more fully below. Revenues from professional services increased $12.6 million (26.7%) to $59.9 million for the nine months ended September 30, 1994 from 16 $47.3 million for the corresponding period in 1993, due primarily to additional services ($13.3 million) generated by the life insurance services business. Revenues from outsourcing services were $93.3 million for the nine months ended September 30, 1994, an increase of $1.2 million (1.3%) compared with the corresponding period in 1993. Revenues from outsourcing services increased $26.5 million as a result of $7.9 million in new outsourcing services relating to life insurance services in Europe and $17.4 million in servicing existing and new contracts with property and casualty insurance companies and residual markets. These increases were partially offset by the wind-down of the New Jersey Market Transition Facility (MTF) project, where revenues from this property and casualty business decreased from $18.0 million for the first nine months in 1993 to $2.1 million for the first nine months in 1994, and to the termination of a facilities management and processing contract in September 1993, representing $9.5 million of life insurance services revenue in Europe for the nine months ended September 30, 1993. Revenues from information services were $146.1 million for the nine months ended September 30, 1994 as compared with $143.8 million for the corresponding period in 1993. This $2.4 million increase is primarily attributable to an increase in business associated with automobile property and casualty information services and life information services. These increases, however, were partially offset by a reduction in property and casualty information services revenue associated with risk services. Costs And Expenses Employee compensation and benefits increased $7.2 million for the nine months ended September 30, 1994 compared with the corresponding period in 1993, primarily as a result of increased costs ($12.6 million) associated with the acquisition of CYBERTEK Corporation in August 1993, and the acquisition of a data center, including its workforce, in Bergen, Norway. The increase in costs associated with these acquisitions was partially offset by a reduction in compensation and other benefits ($5.6 million) resulting from a downsizing in the Company's health insurance services staff from 437 at June 30, 1993 to approximately 238 at September 30, 1994. These scheduled staff reductions are part of the Company's restructuring of its health business (see Note 13 of Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 1993). Computer and communications expenses increased $3.3 million for the nine months ended September 30, 1994 compared with the corresponding period in 1993, primarily as a result of increased costs associated with the acquisition of CYBERTEK Corporation in August 1993, and the acquisition of a data center, including its workforce, in Bergen, Norway. Information services and data acquisition costs increased $4.6 17 million for the nine months ended September 30, 1994 compared with the corresponding period in 1993, due primarily to an increase in the volume of state fees for motor vehicle reports, which is part of the Company's property and casualty information services business. Other operating costs and expenses for the nine months ended September 30, 1994 decreased $25.5 million when compared with the corresponding period in 1993. The decrease is primarily attributable to charges related to early project terminations, the deductible under the Company's Directors' and Officers' liability insurance policy in response to shareholder litigation, cost overruns on certain projects and other charges arising from the Company's previously disclosed internal investigation of its accounting practices. These charges, $16.4 million, were recorded during the six months ended June 30, 1993. In addition to these charges, other operating costs and expenses declined as a result of a reduction in the cost of equipment sold of $3.5 million, a decrease in costs associated with the wind-down of the New Jersey MTF project, a decrease associated with the recovery of certain receivables previously written off, and an increase in amounts capitalized principally related to the internal development of the Company's life software systems. These decreases were partially offset by an increase in operating costs associated with providing total policy management outsourcing services for new customers. Other operating costs and expenses include a charge of $1.9 million associated with the recent settlement of a contract dispute, which was decided through an international arbitration tribunal (see Note 6 of Notes to Consolidated Financial Statements). Due to changes in its estimates, as of September 30, 1994, the Company has reduced its restructuring reserves by $3.5 million, $1.7 million of which resulted from a change in the scheduled downsizing of the Company's health staff and a corresponding reduction in amounts established for severance and outplacement costs, recorded in June 1994, and $1.8 million of which resulted from a lease termination at amounts less than those established for the planned future abandonment of certain leased office facilities, recorded in July 1994 (see Note 5 of Notes to Consolidated Financial Statements). Operating Income Operating income was $36.1 million for the nine months ended September 30, 1994, compared with an operating loss of $81.4 million for the corresponding period in 1993. The operating loss for the nine months ended September 30, 1993 reflected the special charges of $98.8 million relating to impairment and restructuring charges ($80.7 million) and other special charges ($18.1 million). Operating income, excluding impairment and restructuring charges (credits) and other special charges, as a percentage of revenues increased to 8.9% for the nine months ended September 30, 1994 from 5.0% for the comparable period in 1993. This increase resulted primarily from an increase in outsourcing services related to life 18 insurance services in Europe, professional and outsourcing services provided under existing and new contracts with property and casualty insurance companies and residual markets, and to an increase in initial license revenues from both the Company's life and health insurance systems businesses. The Company's health insurance systems business continues to show some improvement over the prior year's first nine month results. Improvements resulted from a significant license agreement expansion resulting in the recognition of $3.5 million in revenue and to a reduction in operating costs associated with amortization charges for certain identifiable intangible assets and goodwill, which were written-off at June 30, 1993, a reduction in rental expense related to lease terminations and compensation and other benefits costs through the downsizing of staff. The property and casualty insurance software and services business experienced a lower level of revenue and operating income primarily from decreased licensing activities and outsourcing services during the nine months ended September 30, 1994 than in the corresponding periods of 1993. Outsourcing services for property and casualty insurers have not met expectations due to several contracts not closing or ramping up as fast as anticipated and the Company has not been able to reduce its operating expenses, associated with the wind-down of the MTF project, as quickly as the reduction in revenue from the MTF occurred. However, as a result of an increased role in servicing additional new contracts with insurance companies and residual markets, the Company is beginning to replace revenues lost from the MTF project during the nine months ended September 30, 1994. Margins have improved but will be reduced during the early phases of these contracts due to start-up costs. The information services businesses, which include property and casualty as well as life information services, produced a net operating loss for the nine months ended September 30, 1994 of $3.6 million. The property and casualty business produced an operating loss of $5.9 million while the life business unit produced operating income of $2.3 million. These results were weaker than that reported for the corresponding period in 1993 where the property and casualty business produced an operating loss of $3.6 million and the life business produced operating income of $3.9 million, resulting in net operating income of $.3 million. The 1994 nine months performance in property and casualty is reflective of increasing price competition and changing market conditions. The life business has been heavily impacted by the implementation of new systems and higher costs to acquire information. In response to the recent performance, the Company has taken and is considering further near-term actions to improve the overall results from information services. One time costs of integrating CYBERTEK with the Company's life insurance systems business continued at a high level in the first nine months of 1994; however, total revenues for the Company's life business were 57.7% higher ($31.8 million) for the nine months ended September 30, 1994, compared with the corresponding period in 1993, 19 due primarily to the CYBERTEK acquisition, the addition of a new outsourcing contract in Europe during December 1993, and to increased initial license revenues. Investment income decreased $3.0 million for the nine months ended September 30, 1994 compared with the corresponding period in 1993, as a result of a lower level of investable funds, resulting from large cash expenditures for the acquisition of CYBERTEK Corporation ($59.7 million) in August 1993, the repurchase in April 1993 of 970,668 shares of the Company's common stock ($48.7 million), the repurchase in May 1994 of 2,278,537 of the 3,797,561 shares of common stock held by IBM ($56.3 million), the repurchase of 938,900 shares of the Company's outstanding common stock, on the open market, ($33.0 million) under its 2.5 million share repurchase authorization, and to a decrease in interest income related to long-term accounts receivable. As part of the Company's repurchase of 2,278,537 of the 3,797,561 shares of its common stock held by IBM, at a price of $24.77 per share, and the open market repurchase of 938,900 shares of common stock, the Company liquidated a portion of its marketable securities portfolio. The Company incurred a loss on the sale of securities of approximately $1.8 million related directly to these repurchases during 1994 (see Note 6 of Notes to Consolidated Financial Statements). Interest expense and other charges increased $.6 million for the nine months ended September 30, 1994 compared with the corresponding period in 1993, primarily as a result of the amortization of discounts associated with long-term restructuring liabilities recorded at June 30, 1993. These liabilities, which are part of restructuring charges established to recognize as a loss the planned future abandonment of certain facilities relating to the restructuring of the Company's health insurance services business, were reduced $1.8 million during the nine months ended September 30, 1994 (see Note 5 of Notes to Consolidated Financial Statements). The effective income tax (benefit) rate (income taxes expressed as a percentage of pre-tax income) was 35.3% and (16.7%) for the nine months ended September 30, 1994 and 1993, respectively. The effective tax benefit rate would have been significantly higher (38.3%) for the 1993 period were it not for the write off of goodwill ($39.4 million) related to the impairment of the Company's health insurance systems business (see Note 13 of Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 1993). The effective income tax rate for the nine months ended September 30, 1994 is lower than the preceeding six month period ended June 30, 1994, principally as a result of a reduction in state income taxes ($.4 million), which are based on gross income and capital of the Company. 20 LIQUIDITY AND CAPITAL RESOURCES September 30, December 31, 1994 1993 Cash and equivalents, marketable (In Millions) securities, and investments $ 70.7 $156.8 Current assets 201.7 287.7 Current liabilities 66.8 81.0 Working capital 134.9 206.7 September 30, September 30, 1994 1993 (In Millions) Cash provided by operations $ 56.7 $ 60.5 Cash provided (used) by investing activities 31.5 (11.4) Cash used for financing activities (94.2) (50.3) The Company's financial condition remained strong at September 30, 1994. Working capital was $134.9 million, including cash, cash equivalents and marketable securities of $63.1 million, and excluding $7.7 million of long-term investments. Cash, cash equivalents, marketable securities and investments were $70.7 million at September 30, 1994 as compared to $156.8 million at December 31, 1993, a net decrease of $86.1 million, resulting primarily from the repurchase in May 1994 of 2,278,537 of the 3,797,561 shares of common stock held by IBM for $56.3 million; the repurchase of 938,900 shares of the Company's common stock for $33.0 million, on the open market, in the third quarter of 1994. The decrease in net cash generated by operations of $3.8 million for the nine months ended September 30, 1994 compared with the corresponding period in 1993 was primarily attributable to payment of lease termination costs, an increase in accounts receivable and a decrease in accounts payable and accrued expenses. This decrease was partially offset by a decrease in income taxes paid. The increase in accounts receivable is primarily due to the Company's claim for recovery of litigation costs (see Note 3 of Notes to Consolidated Financial Statements) and to the high level of software licensing transactions which occurred during the latter part of September 1994. These licensing transactions, most of which required substantial payments at the date of execution, were collected the following month. The Company recorded, at June 30, 1993, impairment charges to reduce the carrying value of certain identifiable intangible assets and goodwill related to its health insurance services business of $54.9 million. Due to this impairment and write-down, the Company decided to restructure this business and take a restructuring charge of $25.2 million as of June 30, 1993. Costs to restructure the health business are composed of $5.2 million associated with employee severance and outplacement, and $20.0 million related to an ongoing lease obligation and/or termination for the planned future abandonment of certain leased office facilities (see Note 13 of Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K 21 for the year ended December 31, 1993). Cash outlays with respect to the restructuring charges were $10.4 million for the nine months ended September 30, 1994. Cash outlays are expected to be approximately $1.9 million for the remainder of 1994. During the nine months ended September 30, 1994, the Company reduced its liabilities for accrued restructuring charges by $8.1 million ($9.0 million in cash outlays, less $.9 million in non-cash discount amortization) for lease terminations and $.4 million (primarily cash) for employee severance and outplacement costs. Additionally, the Company adjusted its restructuring liability established for employee severance and outplacement and lease termination costs downward by $3.5 million. This decrease resulted from a change in the scheduled downsizing of its health staff and a corresponding reduction in amounts established for severance and outplacement costs and a lease termination at amounts less than those established for the planned abandonment of certain leased office facilities. Excluding short-term investments, net cash used by investing activities declined in the first nine months of 1994 compared with the corresponding period in 1993. During the first nine months of 1994, net cash used for investments included $11.7 million compared to $32.4 million for the first nine months of 1993 that was invested in data processing, communications equipment and office furniture and equipment. Approximately $27.4 million of the amount expended in 1993 was for upgrading data processing and communications equipment. Amounts capitalized for internal software development increased $8.3 million (47.2%) to $25.9 million for the first nine months of 1994 compared to $17.6 million for the corresponding period in 1993, due primarily to the development of life systems based on the business functions of CYBERTEK software and the process of integrating CYBERTEK functionality with certain existing Series III applications. Significant expenditures anticipated for the remainder of 1994, excluding any possible business acquisitions and stock repurchases, are as follows: acquisition of data processing, communications equipment and office furniture, fixtures and equipment ($1.7 million); costs relating to the internal development of software systems ($8.6 million); and debt payments relating to past business acquisitions ($2.4 million). The Company has historically used the cash generated from operations for the following: development and acquisition of new products, acquisition of businesses and repurchase of the Company's stock. The Company anticipates that it will continue to use its cash for all of these purposes in the future and that projected cash from operations and cash and investment reserves will be able to meet presently anticipated needs; however, the Company may also consider incurring debt as needed to accomplish specific objectives in these areas and for other general corporate purposes. 22 FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's future operating results may be affected by a number of factors, including uncertainties relative to economic conditions; industry factors; the Company's ability to develop and sell its products profitably; the Company's ability to successfully increase market share in its core business while expanding its product base into other markets; and the Company's ability to effectively manage expense growth relative to revenue growth in anticipation of continued pressure on gross margins. The Company's operating results could be adversely affected should the Company be unable to anticipate customer demand accurately, to introduce new products on a timely basis, or to effectively manage the impact on the Company of changes in the insurance marketplace. Contracts with governmental agencies involve a variety of special risks, including the risk of early contract termination by the governmental agency and changes associated with newly elected state administrations or newly appointed regulators. A significant portion of both the Company's revenue and its operating income is derived from initial licensing charges received as part of the Company's software licensing activities. Because a substantial portion of these revenues are recorded at the time new systems are licensed, there can be significant fluctuations from period to period in the revenues and operating income derived from licensing activities based upon the timing of the licensing of new systems. Because of the foregoing factors, as well as other factors affecting the Company's operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. 23 PART II OTHER INFORMATION POLICY MANAGEMENT SYSTEMS CORPORATION Item 1. Legal Proceedings See Note 3, "Contingencies" of Notes to the Consolidated Financial Statements. Items 2, 3, 4, and 5 are not applicable Item 6. Exhibits and Reports on Form 8-K. Exhibits Exhibits required to be filed with this Quarterly Report on Form 10-Q are listed in the following Exhibit Index. Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended September 30, 1994. 24 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: October 31, 1994 By: Timothy V. Williams Executive Vice President (Chief Financial Officer)
EX-99 2 1 POLICY MANAGEMENT SYSTEMS CORPORATION EXHIBIT INDEX Exhibit Number 10. MATERIAL CONTRACTS A. Shareholders' Agreement, dated April 26, 1994, among Policy Management Systems Corporation, General Atlantic Partners 14, L.P. and GAP Coinvestment Partners (Filed herewith) B. Registration Rights Agreement, dated April 26, 1994 among Policy Management Systems Corporation, General Atlantic Partners 14, L.P. and GAP Coinvestment Partners (Filed herewith) C. Stock Option/Non-Compete Form Agreement for named executive officers together with schedule identifying particulars for each named executive officer (Filed herewith) EX-10 3 1 SHAREHOLDER' AGREEMENT among POLICY MANAGEMENT SYSTEMS CORPORTION, GENERAL ATLANTIC PARTNERS 14, L.P. and GAP COINVESTMENT PARTNERS __________________________ Dated as of April 26, 1994 __________________________ 2 TABLE OF CONTENTS Page 1. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Transfers of Capital Stock . . . . . . . . . . . . . . . . . . 4 2.1 Right of First Offer. . . . . . . . . . . . . . . . . . . 4 2.2 Right of First Offer in Respect of Proposed Transactions Under Rule 144. . . . . . . . . . . . . . 7 3. Board of Directors . . . . . . . . . . . . . . . . . . . . . . 9 3.1 General Atlantic Board Representative . . . . . . . . . . 9 4. Voting and Stand-still Agreement . . . . . . . . . . . . . . . 10 4.1 Term. . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.2 Restrictions on Certain Actions by GAP 14 and GAP Coinvestment.. . . . . . . . . . . . . . . . . . . 10 4.3 Stop Transfer Instructions. . . . . . . . . . . . . . . . 13 4.4 Voting. . . . . . . . . . . . . . . . . . . . . . . . . . 13 5. Representations and Warranties . . . . . . . . . . . . . . . . 14 5.1 Representations and Warranties of GAP 14 and GAP Coinvestment . . . . . . . . . . . . . . . . . . . 14 5.2 Representations and Warranties of the Company. . . . . . . . . . . . . . . . . . . . . . . . 16 5.3 Indemnification.. . . . . . . . . . . . . . . . . . . . . 17 6. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . 18 6.1 Duration. . . . . . . . . . . . . . . . . . . . . . . . . 18 6.2 Legend. . . . . . . . . . . . . . . . . . . . . . . . . . 18 6.3 Successors and Assigns. . . . . . . . . . . . . . . . . . 18 6.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.5 Severability. . . . . . . . . . . . . . . . . . . . . . . 20 6.6 Counterparts. . . . . . . . . . . . . . . . . . . . . . . 20 6.7 Entire Agreement. . . . . . . . . . . . . . . . . . . . . 20 6.8 Amendments and Waivers. . . . . . . . . . . . . . . . . . 21 6.9 Governing Law.. . . . . . . . . . . . . . . . . . . . . . 21 6.10 Rules of Construction.. . . . . . . . . . . . . . . . . . 21 6.11 Headings; References. . . . . . . . . . . . . . . . . . . 21 6.12 Further Assurances. . . . . . . . . . . . . . . . . . . . 21 6.13 Effectiveness . . . . . . . . . . . . . . . . . . . . . . 21 3 SHAREHOLDERS' AGREEMENT SHAREHOLDERS' AGREEMENT, dated as of April 26, 1994, by and among POLICY MANAGEMENT SYSTEMS CORPORATION, a South Carolina corporation (the "Company"), GENERAL ATLANTIC PARTNERS 14, L.P., a Delaware limited partnership ("GAP 14"), and GAP COINVESTMENT PARTNERS, a New York general partnership ("GAP Coinvestment"). Pursuant to a Stock Purchase Agreement, dated as of the date hereof, among GAP 14, GAP Coinvestment and INTERNATIONAL BUSINESS MACHINES CORPORATION, a New York corporation ("IBM") (the "Stock Purchase Agreement"), GAP 14 and GAP Coinvestment have agreed to purchase in the aggregate 1,519,024 shares of common stock, par value $.01 per share, of the Company ("Common Stock," and such 1,519,024 shares of Common Stock are referred to herein as the "Purchased Common Stock") from IBM. Simultaneously with or prior to such purchase, the Company acquired an additional 2,278,537 shares of Common Stock from IBM. As more fully provided for herein, GAP 14 and GAP Coinvestment have granted to the Company certain rights of first offer over the shares of capital stock of the Company owned by GAP 14 and GAP Coinvestment and their affiliates and associates and certain stand-still rights. As partial consideration for the rights granted to the Company hereunder, GAP 14 and GAP Coinvestment have been granted the right to designate a director of the Company and certain other rights, in each case as more fully provided for herein. As further consideration for the obligations of GAP 14 and GAP Coinvestment hereunder, the Company has agreed to provide registration rights to GAP 14 and GAP Coinvestment, as provided for in the Registration Rights Agreement, dated as of date hereof, among GAP 14, GAP Coinvestment and the Company (the "Registration Rights Agreement"). For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Definitions. As used herein, the following terms shall have the meanings set forth below: An "affiliate" of a Shareholder means any individual, partnership, corporation, group, trust or other entity that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with, such Shareholder. The affiliates of GAP 14 shall include, without limitation, (i) any general or limited partner of GAP 14, (ii) any current or former 4 partner, controlling person, shareholder, director, officer or employee of such partner and (iii) any partnership, corporation, group or trust that directly or indirectly controls, or is controlled by, or is under common control with, a general or limited partner of GAP 14. The parties agree and acknowledge that GAP Coinvestment is an affiliate of GAP 14 and that the partners of GAP Coinvestment are affiliates of GAP Coinvestment. An "associate" has the meaning assigned such term in Rule 12b-2 under the Exchange Act. "Beneficial owner" (including correlative forms of such term such as "beneficially own," "beneficial ownership" and "beneficially owned") has the meaning assigned such term in Rule 13d-3 under the Exchange Act. "Board" has the meaning assigned such term in Section 3.1 of this Agreement. "Business Day" means any day other than a Satur- day, Sunday or other day on which commercial banks in the City of New York are authorized or required by law or execu- tive order to close. "Common Stock" has the meaning assigned such term in the second paragraph of this Agreement. "Company" has the meaning assigned such term in the first paragraph of this Agreement. "Company Acceptance" has the meaning assigned such term in Section 2.2(b) of this Agreement. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "IBM" has the meaning assigned such term in the second paragraph of this Agreement. "GAP 14" has the meaning assigned such term in the first paragraph of this Agreement. "GAP" has the meaning assigned such term in the first paragraph of this Agreement. "GASC" has the meaning assigned such term in Section 6.4(c) of this Agreement. "Offered Shares" has the meaning assigned such term in Section 2.1(a) of this Agreement. 5 "Person" means any individual, corporation, limited liability company, partnership, association, trust or other entity or organization. "Purchased Common Stock" has the meaning assigned such term in the second paragraph of this Agreement, and shall include any shares of capital stock of the Company or any successor or assign thereof (whether by merger, consolidation, sale of assets or otherwise) which may be issued in respect of, in exchange for or in substitution of shares of Purchased Common Stock and shall be appropriately adjusted for any stock splits, reverse stock splits, combi- nations, recapitalizations and the like occurring after the date hereof. "Registration Rights Agreement" has the meaning assigned such term in the fourth paragraph of this Agreement. "Rule 144 Price" has the meaning assigned such term in Section 2.2(b) of this Agreement. "Rule 144 Offered Shares" has the meaning assigned such term in Section 2.2(a) of this Agreement. "Rule 144 Shareholder" has the meaning assigned such term in Section 2.2(a) of this Agreement. "Rule 144 Shareholder Offer" has the meaning assigned such term in Section 2.2(a) of this Agreement. "Securities Act" means the Securities Act of 1933, as amended. "Selling Shareholder" has the meaning assigned such term in Section 2.1(a) of this Agreement. "Selling Shareholder Offer" has the meaning assigned such term in Section 2.1(a) of this Agreement. "Shareholder" means GAP 14, GAP Coinvestment and their respective successors and permitted assigns, to the extent provided for in Section 6.3 hereof. "Stock Purchase Agreement" has the meaning assigned such term in the second paragraph of this Agreement. "Successor" means any corporation or other entity succeeding to the Company, the majority of the voting shares or other voting interests of which are at the time of such 6 succession beneficially owned by the shareholders of the Company. "Term" has the meaning assigned such term in Section 4.1 of this Agreement. "Total Voting Power" has the meaning assigned such term in Section 4.1 of this Agreement. "Voting Securities" has the meaning assigned such term in Section 4.1 of this Agreement. 2. Transfers of Capital Stock. 2.1 Right of First Offer. (a) If any Shareholder (a "Selling Shareholder") desires to sell, give, transfer, distribute, assign or otherwise dispose of all or any portion of the Purchased Common Stock (other than (i) to an affiliate of a Shareholder who has agreed with the Company in writing to be bound by the provisions of this Agreement, including without limitation, in connection with the termination or amendment of a Shareholder's partnership agreement (provided that the availability of the exception to the right of first offer provided by this clause (i) shall be subject to Section 2.1(e)) or (ii) in a sale under Rule 144 under the Securities Act), then such Selling Shareholder shall first make a written offer (a "Selling Shareholder Offer") (for purposes of this Agreement, a request for registration pursuant to the Registration Rights Agreement shall be deemed to constitute a Selling Shareholder Offer) to sell, transfer or assign such shares of Purchased Common Stock (the "Offered Shares") to the Company. The Selling Shareholder Offer shall state (i) the number of Offered Shares, (ii) the proposed cash sale price therefor and (iii) any other material terms and conditions of the Selling Shareholder Offer. A Selling Shareholder Offer shall constitute an irrevocable offer by such Selling Shareholder to sell to the Company the Offered Shares at the proposed cash sale price in cash unless the closing does not occur for any reason whatsoever within 60 days following receipt of the Selling Shareholder Offer. For purposes of this Section 2.1(a), the proposed cash sale price for any Purchased Common Stock which a Selling Shareholder desires to give or distribute to another Person (other than an affiliate acquiring pursuant to clause (i) of the first sentence of this Section 2.1(a) in a transaction exempt from the right of first offer provided in this Section 2.1) shall be deemed to be the 7 closing price of the Common Stock on the principal exchange on which the Common Stock is listed on the day the Selling Shareholder Offer is received by the Company. (b) Upon receipt of a Selling Shareholder Offer, the Company shall have the right to purchase, upon the terms and conditions of the Selling Shareholder Offer, all, but not less than all, of the Offered Shares, which right shall be exercisable by irrevocable written notice to the Selling Shareholder given within 5 Business Days after the Selling Shareholder Offer is received by the Company. (c) The closing of any sale to the Company pursuant to this Section 2.1 shall be held at the principal office of the Company on the 30th Business Day after the Selling Shareholder Offer is received by the Company, or at such other time and place as the Company and the Selling Shareholder may agree upon; provided that if there is any litigation or governmental requirements relating to such purchase and sale, the closing date shall be postponed until a date not more than 10 days after the termination of such litigation or satisfaction of such governmental requirements. At such closing, the Selling Shareholder shall deliver to the Company certificates representing the Offered Shares duly endorsed for transfer and accompanied by all requisite stock transfer taxes, and such Offered Shares shall be free and clear of any liens, claims, options, charges, encumbrances, or rights of others. The Company shall deliver to the Selling Shareholder at the closing, by certified check or wire transfer, the purchase price for the Offered Shares being sold by the Selling Shareholder. The Company and the Selling Shareholder shall execute such documents as are otherwise customary and appropriate. (d) If the Company does not elect to pur- chase all of the Offered Shares as set forth above, then, during the 120 days following the date on which the Company shall cease to be entitled to elect to purchase the Offered Shares (or shall have waived in writing its right to do so), the Selling Shareholder may dispose of all, but not less than all, of the Offered Shares upon terms that, in the aggregate, are no more favorable to the purchaser thereof than those stated in the Selling Shareholder Offer. If such disposition is not consummated within such 120 days, the restrictions provided for herein shall again become effec- tive. (e) Notwithstanding clause (i) of the second parenthetical contained in Section 2.1(a), any sale, gift, transfer, assignment or other disposition of shares of 8 Purchased Common Stock to an affiliate of a Selling Shareholder shall be subject to the right of first offer provided for in this Section 2.1 if (i) such sale, transfer, assignment or other disposition is to occur prior to the third anniversary of this Agreement or (ii) prior to such sale, gift, transfer, assignment or other disposition, a total of ten transfers which were exempt from the right of first offer provided for in this Section 2.1 by virtue of clause (i) of the second parenthetical contained in Section 2.1(a) were made. (f) Notwithstanding the foregoing, not less than 15 days prior to any proposed sale by a Selling Shareholder of Voting Securities pursuant to this Section 2.1 constituting 1% or more of the Total Voting Power to any Restricted Person (as defined below) the Selling Shareholder shall give notice of the identity of such Restricted Person to the Company and the Company shall have the right, exercisable by delivery of a written election notice to the Selling Shareholder within 10 days of receipt of the notice from the Selling Shareholder of the proposed sale, to purchase all of the Offered Shares at the price specified in the Selling Shareholder's Offer. If the Company fails to purchase the Offered Shares within such 10- day period, the Selling Shareholder shall be permitted to proceed with its or their sale to such Restricted Person in accordance with Section 2.1(d). "Restricted Person" shall mean a person who is a material competitor of the Company or any material subsidiary of the Company. The affiliates of GAP 14 and GAP Coinvestment shall not be deemed Restricted Persons by virtue of any ownership interest they may have in other companies. (g) No transfer of Offered Shares to a third party (including, without limitation, any assignee of a party entitled to purchase such shares) pursuant to Section 2.1(d) shall be consummated or recorded in the Company's stock transfer books unless (i) the transferee of such Offered Shares shall have furnished the Company a written opinion of counsel reasonably satisfactory to counsel for the Company that the proposed transfer may be effected without registration under the Securities Act, and (ii) the transferee of such Offered Shares shall have furnished the Company a written instrument to the effect that (A) it is acquiring such shares for its own account, for investment, and not with a view to, or for sale in connection with, the distribution thereof, and (B) it understands that such shares have not been registered under the Securities Act by reason of their issuance in a transaction exempt from the requirements of the Securities Act and that such shares must be held indefinitely unless a 9 subsequent disposition thereof is registered under the Securities Act or is exempt from such requirements. (h) Any underwriters participating in a distribution of Voting Securities beneficially owned by a Selling Shareholder or its affiliates or associates pursuant to this Agreement, including without limitation any distribution referred to in Section 2.1(a) hereof, shall use all reasonable efforts to effect as wide a distribution as is reasonably practicable, and in no event shall any sale (other than a sale to underwriters making such a distribution) of shares of Voting Securities be made knowingly to any Person (including its affiliates or associates and any group in which that Person or its affiliates or associates shall be a member if the Selling Shareholder or such underwriters know of the existence of such a group or affiliate or associate) that, after giving effect to such sale, would beneficially own Voting Securities representing three percent (3%) or more of the Total Voting Power. The Selling Shareholder shall use reasonable best efforts to secure the agreement of the underwriters, in connection with any underwritten offerings of its Voting Securities, to comply with the foregoing. 2.2 Right of First Offer in Respect of Proposed Transactions Under Rule 144. (a) If, during any given 30-day period, any Shareholder (a "Rule 144 Shareholder") contemplates the sale of all or any portion of the Purchased Common Stock beneficially owned by the Rule 144 Shareholder in a sale under Rule 144 under the Securities Act, then, at least five Business Days before the commencement of such period, the Rule 144 Shareholder shall notify the Company in writing that it is contemplating the sale of shares of Purchased Common Stock in such manner and the maximum number of such shares that the Rule 144 Shareholder contemplates the sale of during such 30-day period; provided, however that the Rule 144 Shareholder shall not give such notice more than once during any 30-day period. If the Rule 144 Shareholder thereafter decides to sell shares of Purchased Common Stock, such Rule 144 Shareholder shall first make a written offer (a "Rule 144 Shareholder Offer") to sell such shares of Purchased Common Stock (the "Rule 144 Offered Shares") to the Company. The Rule 144 Shareholder Offer shall be provided to the Company no later that 4:30 p.m., local time, on the Business Day preceding such contemplated sale and shall set forth the number of shares of Rule 144 Offered Shares. (b) Upon receipt of the Rule 144 Shareholder Offer, the Company shall have the right to 10 purchase all or any portion of the Rule 144 Offered Shares at the closing price of the Common Stock on the principal exchange on which the Common Stock is listed on the date on which such notice is given (the "Rule 144 Price"), which right shall be exercisable by written notice to the Rule 144 Shareholder (the "Company Acceptance") given by 8:00 a.m. local time on the Business Day immediately following the Business Day on which the Rule 144 Shareholder Offer is received. (c) If the Company Acceptance is delivered by the Company to the Rule 144 Shareholder in accordance with the preceding paragraph, the closing of the sale of the Rule 144 Offered Shares to be sold to the Company shall be held at the principal office of the Company on or before the first Business Day following the date on which bond settlements are made by brokers in the ordinary course for bonds sold on the date of the Company Acceptance or at such time and place as the Company and the Rule 144 Shareholder shall agree upon. At such closing, the Rule 144 Shareholder shall deliver to the Company certificates representing such Rule 144 Offered Shares, duly endorsed for transfer and accompanied by all requisite stock transfer taxes, and such Rule 144 Offered Shares shall be free and clear of any liens, claims, options, charges, encumbrances, or rights of others. The Company shall deliver at the closing, by certified check or wire transfer, the Rule 144 Price multiplied by the number of Rule 144 Offered Shares purchased by the Company. The Company and the Rule 144 Shareholder shall execute such documents as are otherwise customary and appropriate. (d) If the Company does not elect to purchase all of the Rule 144 Offered Shares, or fails to deliver the Company Acceptance in accordance with Section 2.2(b) above, then, during the ten Business Days following the date on which the Rule 144 Notice was given, the Rule 144 Shareholder may dispose of the Rule 144 Offered Shares which the Company has elected not to purchase in one or more market transactions under Rule 144 under the Securities Act. If such disposition is not consummated within such ten Business Days, the restrictions provided for herein shall again become effective. (e) Failure by the Company to exercise its right to purchase Rule 144 Shares held by the Selling Shareholder pursuant to this Section 2.2 shall not affect the Company's right to purchase Rule 144 Shares pursuant to this Section 2.2 in any subsequent instance. (f) Section 2.2(a) through (e) shall be unavailable to the Shareholders during any period in which 11 the conditions contained in Rule 144 have not been satisfied. The Shareholders acknowledge that the conditions contained in Rule 144, including Section (c)(1) thereof have not been satisfied as of the date hereof. The Shareholders agree to be bound by the requirements of Rule 144 applicable to "affiliates" as defined therein as long as they meet the definition of "affiliates" set forth therein. 3. Board of Directors. 3.1 General Atlantic Board Representative. (a) The Company shall use its reasonable best efforts to cause the Board of Directors of the Company (the "Board") to promptly, but in no event later than 15 Business Days after the effective date hereof, appoint a designee of GAP 14 and GAP Coinvestment to fill a vacancy on the Board (which GAP 14 and GAP Coinvestment agrees shall be Steven A. Denning or another general partner of the general partner of GAP 14 reasonably acceptable to the Company). The Company represents and warrants that on the date of such appointment there shall be a vacancy on the Board. Thereafter, for so long as GAP 14 and GAP Coinvestment and their affiliates and associates shall together beneficially own shares of capital stock of the Company representing at least 5% of the Total Voting Power of the Company, and subject to the further provisions hereof, the Company's nominating committee (or any other committee exercising a similar function) shall recommend to the Board that such individual be included in the slate of nominees recommended by the Board to shareholders for election as a director at each annual meeting of shareholders of the Company at which directors of the class of which the nominee of GAP 14 and GAP Coinvestment is a member are elected, commencing with the next annual meeting of shareholders after the effective date hereof. (b) Notwithstanding the provisions of this Section 3.1, GAP 14 and GAP Coinvestment shall not be entitled to designate any individual to the Board if such designation would result in any violation of applicable law or order. The Company shall not be obligated to elect to its Board any individual who would cause or be reasonably likely to cause the Company to be unable in any material respect to conduct its business. If any such individual has been designated by GAP 14 and GAP Coinvestment and rejected by the Company, GAP 14 and GAP Coinvestment shall be permitted to designate a substitute designee for such individual in accordance with this Section 3.1. 12 4. Voting and Stand-still Agreement. 4.1 Term. The term (the "Term") of the obligations set forth in this Article 4 shall commence on the date hereof and shall continue until the date on which the Voting Power of the Voting Securities, on a fully diluted basis, beneficially owned by GAP 14 and GAP Coinvestment and their affiliates and associates shall represent less than 1.5% of the Total Voting Power. For the purposes of this Agreement (i) the term "Voting Securities" shall mean any securities entitled to vote generally in the election of directors of the Company or any Successor, or any direct or indirect rights or options to acquire any such securities or any securities convertible or exercisable into or exchangeable for such securities, (ii) the term "Voting Power" shall mean the voting power in the general election of directors of the Company, and (iii) the term "Total Voting Power" shall mean the total combined Voting Power of all of the Voting Securities then outstanding. For purposes of this Article 4, in the event that GAP 14 or GAP Coinvestment, an affiliate or associate of GAP 14 or GAP Coinvestment is, or has a representative or designee who is, a member of the Board of Directors or other governing entity of a corporation, partnership or other entity, a rebuttable presumption shall be created that such corporation, partnership or other entity is controlled by GAP 14 or GAP Coinvestment or such affiliate and is an affiliate of GAP 14 or GAP Coinvestment. 4.2 Restrictions on Certain Actions by GAP 14 and GAP Coinvestment. (a) During the Term, GAP 14 and GAP Coinvestment will not, and will cause each of its affiliates and associates not to, singly or as part of a partnership, limited partnership, syndicate or other group (as those terms are used in Section 13(d)(3) of the Exchange Act), directly or indirectly: (i) acquire, offer to acquire, or agree to acquire, directly or indirectly, by purchase, gift or otherwise, any Voting Securities if, as a result of such acquisition, GAP 14 and GAP Coinvestment and their affiliates and associates would beneficially own in excess of (A) at any time that the Company's directors' and officers' liability insurance excludes claims in respect of any director that is an affiliate of the beneficial owner of 15% or more of the Voting Securities, 14.99% of the Total Voting Power or (B) at any other time, 19.99% of the Total Voting Power; 13 (ii) make, or in any way participate in any "solicitation" of "proxies" to vote (as such terms are defined in Rule 14a-1 under the Exchange Act), solicit any consent or communicate with or seek to advise or influence any person or entity with respect to the voting of any Voting Securities or become a "participant" in any "election contest" (as such terms are defined or used in Rule 14a-11 under the Exchange Act) with respect to the Company; (iii) form, join or encourage the formation of, any "person" or "group" within the meaning of Section 13(d)(3) of the Exchange Act with respect to any Voting Securities provided that this Section 4.2(a)(iii) shall not prohibit any such arrangement solely among GAP 14 and any of its wholly-owned subsidiaries; (iv) deposit any Voting Securities into a voting trust or subject any such Voting Securities to any arrangement or agreement with respect to the voting thereof, provided that this Section 4.2(a)(iv) shall not prohibit any such arrangement solely among GAP 14 and GAP Coinvestment and any of their wholly-owned subsidiaries; (v) initiate, propose or otherwise solicit stockholders for the approval of one or more stockholder proposals with respect to the Company as described in Rule 14a-8 under the Exchange Act, or induce or attempt to induce any other person to initiate any stockholder proposal; (vi) except for this Agreement, seek election to or seek to place a representative on the Board or, except with the approval of the Board, seek the removal of any member of the Board; (vii) except with the approval of the Board, call or seek to have called any meeting of the stockholders of the Company; (viii) except through their representative on the Board, otherwise act, directly or indirectly, alone or in concert with others, to seek to control, disrupt or influence the Board, policies or affairs of the Company (including by means of providing or arranging financing or providing financial advisory services for any proposal or action referred to in this Section 4.2), except with the approval of the Board; (ix) sell or otherwise transfer in any manner any Voting Securities to any "person" (within the meaning of Section 13(d)(3) of the Exchange Act) who 14 beneficially owns, or who as a result of such sale or transfer will beneficially own, more than three percent (3%) of any class of Voting Securities or who, without the approval of the Board, has proposed a business combination or similar transaction with, or a change of control of, the Company or who has proposed a tender offer for Voting Securities or who has discussed the possibility of proposing a business combination or similar transaction with, or a change in control of, the Company with GAP 14 or GAP Coinvestment or any of their respective affiliates or associates; (x) solicit, propose, seek to effect, negotiate with or provide any information to any other party with respect to, or make any statement or proposal, whether written or oral, to the Board or any director or officer of the Company or otherwise make any public announcement or proposal whatsoever with respect to, the Company, including, without limitation, a merger, exchange offer or liquidation of the Company's assets, or any restructuring, recapitalization or similar transaction with respect to the Company; (xi) instigate or encourage any third party to do any of the foregoing, including any statement or proposal that is conditioned on or would require the Company to waive the benefit of or amend any provision hereof, or assist, participate in, facilitate, encourage any effort or attempt by any person to do or seek to do any of the foregoing; (xii) request the Company (or its directors, officers, employees or agents), directly or indirectly, to amend or waive any provision of this Section 4.2(a) or otherwise seek any modification to or waiver of any of GAP 14's, GAP Coinvestment's or their affiliates' or associates' agreements or obligations under this Section 4.2(a); or (xiii) encourage or render advice to or make any recommendation or proposal to any person or other entity to engage in any of the actions covered by this Section 4.2(a). (b) If, as a result of any repurchase of Voting Securities by the Company, the percentage of Total Voting Power to be held by a Shareholder together with its affiliates and associates would exceed the percentage of Total Voting Power permitted to be held by such Shareholder and its affiliates and associates pursuant to clause (A) or (B) of Section 4.2(a)(i) above, as applicable, such Shareholder shall, and shall cause each of its affiliates and associates to, sell to the Company (x) its pro rata 15 portion of the total number of Voting Securities representing such excess to be repurchased by the Company or (y) any percentage of the total number of Voting Securities to be offered to the Company by such Shareholder and its affiliates and associates as they and the Company shall each agree. Such Voting Securities shall be offered to the Company at a price per share equal to the average of the closing price of the Common Stock of the Company on the principal exchange on which such class of stock is then listed for the ten trading days preceding the date on which the requirement to make such offer to sell arose. If any of the Shareholders or any of its affiliates or associates beneficially owns or acquires any Voting Securities in violation of this Agreement, such Voting Securities shall be disposed of to persons who are not affiliates or associates thereof but only in compliance with the provisions of this Section 4.2; provided, however, that the Company may also pursue any other available remedy to which it may be entitled as a result of such violation. Nothing contained in this Agreement shall prohibit GAP 14 or GAP Coinvestment or any of their affiliates or associates from selling shares of Common Stock to the Company in any Company-initiated share tender. 4.3 Stop Transfer Instructions. The certificates representing the Purchased Common Stock shall have placed thereon a legend evidencing the foregoing restrictions. Each Shareholder consents to the entry of a stop transfer order with respect to any purported transfer of Purchased Common Stock or Voting Securities in contravention of the restrictions contained in this Agreement. 4.4 Voting. During the Term, whenever a Shareholder or any of its affiliates or associates shall have the right to vote such Voting Securities, it shall and shall cause its affiliates and associates to (a) be present, in person or represented by proxy, at all shareholder meetings of the Company so that all Voting Securities beneficially owned by it and its affiliates and associates shall be counted for the purpose of determining the presence of a quorum at such meetings, and (b) vote or cause to be voted, or consent with respect to, all Voting Securities beneficially owned by it and its affiliates and associates in the manner recommended by the Board, except that during any period or at any time when there shall be in full force and effect a valid order or judgment of a court of competent jurisdiction or a ruling, pronouncement or requirement of the New York Stock Exchange, Inc. (the "NYSE") to the effect that the foregoing provision of this Section 4.4 is invalid, void, unenforceable or not in accordance with NYSE policy, then, such Shareholder shall, and shall cause its affiliates 16 and associates to, if so requested by the Board, vote or cause to be voted all of its Voting Securities beneficially owned by it and its affiliates and associates in the same proportion as the votes cast by or on behalf of all the other holders of the Company's Voting Securities. 5. Representations and Warranties. 5.1 Representations and Warranties of GAP 14 and GAP Coinvestment. Each of GAP 14 and GAP Coinvestment hereby represents, warrants and covenants to the Company as follows: (a) Organization and Good Standing. GAP 14 is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware. GAP Coinvestment is a general partnership duly organized and validity existing under the laws of the State of New York. (b) Authority; Execution and Delivery, etc. Each of GAP 14 and GAP Coinvestment has full power and authority to enter into this Agreement and to perform its obligations in accordance with the terms hereof. The execution, delivery and performance of this Agreement have been duly authorized by each of GAP 14 and GAP Coinvestment and no other actions on the part of GAP 14 or GAP Coinvestment are required. This Agreement has been duly executed and delivered by each of GAP 14 and GAP Coinvestment and constitutes the legal, valid and binding obligation of each of GAP 14 and GAP Coinvestment, enforceable against it in accordance with its terms. (c) Consents, No Conflicts, etc. Neither the execution and delivery of this Agreement, the consummation by GAP 14 or GAP Coinvestment of the transactions contemplated hereby, nor compliance by GAP 14 or GAP Coinvestment with any of the provisions hereof will (with or without the giving of notice or the passage of time) (i) violate or conflict with any provision of the general or limited partnership agreement (or equivalent organizational documents) of GAP 14 or GAP Coinvestment or any agreement, instrument, judgment, decree, statute or regulation applicable to GAP 14 or GAP Coinvestment or any assets or properties of GAP 14 or GAP Coinvestment, (ii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to GAP 14 or GAP Coinvestment, or any of the respective assets or properties of GAP 14 or GAP Coinvestment, or (iii) require the consent, approval, permission or other authorization of or by, or designation, declaration, filing, registration or qualification with, any 17 court, arbitrator or governmental, administrative or self- regulatory authority or any other third party whatsoever other than disclosure of the transactions contemplated hereby in the filings of GAP 14, GAP Coinvestment or in the filings of either of their respective affiliates, pursuant to the federal securities laws and the rules of any stock exchange on which the securities of GAP 14, GAP Coinvestment or any of their respective affiliates are listed. (d) Litigation. There is no litigation, proceeding, labor dispute, arbitral action or government investigation pending or, so far as known to GAP 14 or GAP Coinvestment, threatened against GAP 14 or GAP Coinvestment with respect to this Agreement which if adversely determined could prohibit or prevent GAP 14 or GAP Coinvestment from consummating the transactions contemplated hereby. There are no decrees, injunctions or orders of any court or governmental department or agency outstanding against GAP 14 or GAP Coinvestment. (e) No Brokers. Neither GAP 14 nor GAP Coinvestment has entered into and neither will enter into any agreement, arrangement or understanding with any person or firm which will result in the obligation of the Company to pay any finder's fee, brokerage commission or similar payment in connection with the transactions contemplated hereby. Each of GAP 14 and GAP Coinvestment agrees to indemnify and hold the Company harmless from and against any and all claims, liabilities or obligations with respect to any finder's fees, brokerage commissions or similar payments asserted by any person on the basis of any act or statement alleged to have been made by GAP 14 or GAP Coinvestment. (f) Access to Information. Each of GAP 14 and GAP Coinvestment acknowledges that it has been furnished access to the business records of the Company and such additional information as it has requested in order that it make an informed decision regarding the transactions contemplated hereby and the acquisition of the Purchased Common Stock and has been given the opportunity to meet with representatives of the Company and to have them answer questions regarding the Company's affairs and condition. Each of GAP 14 and GAP Coinvestment is an experienced and sophisticated participant in transactions of the kind contemplated hereby, is capable of evaluating the merits and risks of transactions of the kind contemplated hereby, is experienced in the evaluation of enterprises such as the Company and has undertaken such investigation and evaluated such information regarding the Company as it has deemed necessary to make an informed and intelligent decision with respect to the execution and performance of this Agreement and the acquisition of the Purchased Common Stock. Each of 18 GAP 14 and GAP Coinvestment acknowledges that the Company makes no representation and warranty as to the Company's financial condition, results of operations, business, assets or prospects, except as set forth in Section 5.2(e) hereof. Each of GAP 14 and GAP Coinvestment is acquiring the Purchased Common Stock for investment only and not with a view to the distribution of the Purchased Common Stock or any interest therein. 5.2 Representations and Warranties of the Company. The Company hereby represents, warrants and covenants to GAP 14 and GAP Coinvestment as follows: (a) Organization and Good Standing. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of South Carolina. (b) Authority; Execution and Delivery, etc. The Company has full power and authority to enter into this Agreement and the Registration Rights Agreement and to perform its obligations in accordance with the terms hereof and thereof. The execution, delivery and performance of this Agreement and the Registration Rights Agreement have been duly authorized by the Company and no other actions on the part of the Company are required. This Agreement and the Registration Rights Agreement have been duly executed and delivered by the Company and constitute the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with their respective terms except for Section 8 of the Registration Rights Agreement, as to which no representation is made. (c) Consents, No Conflicts, etc. Neither the execution and delivery of this Agreement nor the Registration Rights Agreement, the consummation by the Company of the transactions contemplated hereby and thereby, nor compliance by the Company with any of the provisions hereof or thereof will (with or without the giving of notice or the passage of time) (i) violate or conflict with any provision of the Articles of Incorporation or By-Laws of the Company or any agreement, instrument, judgment, decree, statute or regulation applicable to the Company or any assets or properties of the Company, (ii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Company or any assets or properties of the Company or (iii) require the consent, approval, permission or other authorization of or by, or designation, declaration, filing, registration or qualification with, any court, arbitrator or governmental, administrative or self- regulatory authority or any other third party whatsoever, 19 other than disclosure of the transactions contemplated hereby in the Company's filings pursuant to the federal securities laws and the rules of any stock exchange on which the Common Stock is listed except, in the case of clauses (i), (ii) and (iii) above, for Section 8 of the Registration Rights Agreement, as to which no representation is made. (d) Litigation. There is no litigation, proceeding, labor dispute, arbitral action or government investigation pending or, so far as known to the Company, threatened against the Company with respect to the transactions contemplated by this Agreement or the Registration Rights Agreement which if adversely determined could prohibit or prevent the Company from consummating the transactions contemplated hereby or thereby. There are no decrees, injunctions or orders of any court or governmental department or agency outstanding against the Company with respect to the transactions contemplated hereby or by the Registration Rights Agreement. (e) Accuracy of Disclosure. To the best knowledge of the Company, all of the information provided to GAP 14 and GAP Coinvestment in connection with the transactions contemplated hereby, by the Stock Purchase Agreement and by the Registration Rights Agreement is true and accurate in all material respects; provided, that, the Company does not make any representations or warranties as to the truth, completeness or accuracy of any projections or other forward-looking information provided to GAP 14 and/or GAP Coinvestment or any financial statements in respect of any financial period of the Company that are to be restated. (f) No Brokers. The Company has not entered into and will not enter into any agreement, arrangement or understanding with any person or firm which will result in the obligation of GAP 14 or GAP Coinvestment to pay any finder's fee, brokerage commission or similar payment in connection with the transactions contemplated hereby. The Company agrees to indemnify and hold GAP 14 or GAP Coinvestment harmless from and against any and all claims, liabilities or obligations with respect to any finder's fees, brokerage commissions or similar payments asserted by any person on the basis of any act or statement alleged to have been made by the Company. 5.3 Indemnification. The representations and warranties of the parties made in this Agreement will survive for a period ending on the first anniversary of the date of this Agreement. 20 (a) The Company agrees to indemnify, defend and hold harmless the Shareholders from and against all losses, liabilities, damages and deficiencies, based upon, arising out of, or otherwise in respect of, any inaccuracy in or any breach of any representation or warranty contained in Section 5.2 of this Agreement. (b) The Shareholders agree to indemnify, defend and hold harmless the Company from and against all losses, liabilities, damages and deficiencies based upon, arising out of, or otherwise in respect of, any inaccuracy in or any breach of any representation or warranty contained in Section 5.1 of this Agreement. 6. Miscellaneous. 6.1 Duration. This Agreement shall continue in full force and effect until terminated by mutual agreement between the Company and the Shareholders or until the signatories hereto and each of the Persons who has agreed in writing to be bound hereby cease to beneficially own shares of capital stock of the Company. 6.2 Legend. Each certificate representing shares of capital stock acquired from the Company by any Shareholder shall, for as long as this Agreement is effective, bear the legend set forth below (or such other legend deemed to be appropriate by the Company and counsel to the Shareholder beneficially owning the shares of capital stock represented by such certificate): "The securities represented by this Certificate have not been registered under the Securities Act of 1933, as amended, and are subject to a Shareholders' Agreement, dated as of April 26, 1994, and may not be sold, assigned, transferred, pledged or otherwise disposed of except in compliance with applicable law and such Shareholders' Agreement." 6.3 Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and "permitted assigns" of the Company. For purposes of this Agreement, permitted assigns means the signatories hereto and each of the Persons who has agreed in writing to be bound by the provisions hereof. This Agreement shall inure to the benefit of and be binding upon (i) the successors of GAP 14, GAP Coinvestment and their respective affiliates and (ii) the permitted assigns of GAP 14, GAP Coinvestment and their respective affiliates to the extent that the assignee is an affiliate of such 21 assignor. Except as expressly otherwise provided herein, this Agreement may not be assigned by any party hereto without the prior written consent of the other parties hereto. 6.4 Notices. (a) All notices and other communications hereunder shall be in writing and shall be deemed given if telecopied or delivered personally or mailed by registered or certified mail (return receipt requested) to the following address (or at such other address as shall be specified by like notice; provided, that, notice of a change of address shall be effective only upon receipt thereof): (i) if to GAP 14 or GAP Coinvestment: General Atlantic Service Corporation 125 East 56th Street New York, New York 10022 Attention: Steven A. Denning Telephone: (212) 888-9191 Facsimile: (212) 644-8339 with a copy to: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019-6064 Attention: Matthew Nimetz, Esq. Telephone: (212) 373-3000 Facsimile: (212) 757-3990 (ii) if to the Company (two copies): Policy Management Systems Corporation One PMS Center Blythewood, South Carolina 29016 Attention: President; General Counsel Telephone: (803) 735-4000 Facsimile: (803) 735-5560 with a copy to: Dewey Ballantine 1301 Avenue of the Americas New York, New York 10019 Attention: Robert C. Myers, Esq. Telephone: (212) 259-8000 Facsimile: (212) 259-6333 22 (iii) if to any other Shareholder, at its address as it appears on the transfer books of the Company. (b) Any notice given by telecopier or delivered personally shall be deemed to have been received by the recipient thereof on the day delivered if actually received during normal business hours on a Business Day; otherwise, such notice shall be deemed received on the next following Business Day if actually received on such day. All other notices in accordance herewith shall be effective on the day actually received by the Company. Any party hereto may, by notice to the other parties hereto, change its address for receipt of notices hereunder. (c) GAP 14 and GAP Coinvestment each hereby designates General Atlantic Service Corporation ("GASC") as its representative to receive any notice hereunder and to communicate with the Company on its behalf. The Company hereby acknowledges the designation of GASC as the repre- sentative of each of GAP 14 and GAP Coinvestment for purposes of this Section 6.4. Any notice given by the Company to GASC shall be deemed given to the Shareholder to whom it is addressed, and any notice given to the Company by GASC on behalf either GAP 14 and GAP Coinvestment shall have the same effect as if given to the Company by such Shareholder. 6.5 Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, it being intended that all of the rights and privileges of the Shareholders shall be enforceable to the fullest extent permitted by law. 6.6 Counterparts. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 6.7 Entire Agreement. This Agreement embodies the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties, covenants or understandings, other than those set forth or referred to herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 23 6.8 Amendments and Waivers. Except as otherwise provided herein, the provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless such amendment, modification, supplement or waiver has been consented to in writing by the Company and the holders of a majority of the Voting Securities held of record by the Shareholders. 6.9 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of South Carolina applicable to agreements made and to be performed entirely within such State, without regard to the principles of conflicts of law of such State. 6.10 Rules of Construction. Unless the context otherwise requires, "or" is not exclusive, and references to sections or subsections refer to sections or subsections of this Agreement. 6.11 Headings; References. The headings appearing in this Agreement are for convenience of reference only and shall not affect the interpretation of this Agree- ment. Except as otherwise indicated herein, all references herein to Sections refer to the Sections contained in this Agreement. 6.12 Further Assurances. Each of the parties shall execute such documents and perform such further acts as may be reasonably required or desirable to carry out or to perform the provisions of this Agreement. 6.13 Effectiveness. This Agreement shall be effective upon the purchase of the Purchased Common Stock by GAP 14 and GAP Coinvestment pursuant to the Stock Purchase Agreement, and if such purchase does not occur on or before September 30, 1994, this Agreement shall terminate and be of no force or effect. 24 IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of the date first above written. POLICY MANAGEMENT SYSTEMS CORPORATION By: _________________________________ G. Larry Wilson Chairman, President and Chief Executive Officer GENERAL ATLANTIC PARTNERS 14, L.P. By: GENERAL ATLANTIC PARTNERS Its General Partner By: _________________________________ Steven A. Denning Managing General Partner GAP COINVESTMENT PARTNERS By: __________________________________ Steven A. Denning Managing Partner EX-10 4 1 REGISTRATION RIGHTS AGREEMENT among POLICY MANAGEMENT SYSTEMS CORPORATION GENERAL ATLANTIC PARTNERS 14, L.P. and GAP COINVESTMENT PARTNERS ___________________________________ Dated as of April 26, 1994 __________________________________ 2 TABLE OF CONTENTS Page 1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Securities Subject to this Agreement. . . . . . . . . . . . . 3 (a) Registrable Securities . . . . . . . . . . . . . . . . . 3 (b) Holders of Registrable Securities. . . . . . . . . . . . 3 3. Demand Registration . . . . . . . . . . . . . . . . . . . . . 4 (a) Request for Demand Registration. . . . . . . . . . . . . 4 (b) Effective Demand Registration. . . . . . . . . . . . . . 5 (c) Expenses . . . . . . . . . . . . . . . . . . . . . . . . 5 (d) Underwriting Procedures. . . . . . . . . . . . . . . . . 5 (e) Selection of Underwriters. . . . . . . . . . . . . . . . 6 4. Piggy-Back Registration . . . . . . . . . . . . . . . . . . . 6 (a) Piggy-Back Rights. . . . . . . . . . . . . . . . . . . . 6 (b) Expenses . . . . . . . . . . . . . . . . . . . . . . . . 7 5. Holdback Agreements . . . . . . . . . . . . . . . . . . . . . 7 (a) Restrictions on Public Sale by Holders . . . . . . . . . 7 (b) Restrictions on Public Sale by the Company . . . . . . . 7 6. Registration Procedures . . . . . . . . . . . . . . . . . . . 7 (a) Obligations of the Company . . . . . . . . . . . . . . . 7 (b) Seller Information . . . . . . . . . . . . . . . . . . . 11 (c) Notice to Discontinue. . . . . . . . . . . . . . . . . . 11 7. Registration Expenses . . . . . . . . . . . . . . . . . . . . 11 8. Indemnification; Contribution . . . . . . . . . . . . . . . . 12 (a) Indemnification by the Company . . . . . . . . . . . . . 12 (b) Indemnification by Holders . . . . . . . . . . . . . . . 12 (c) Conduct of Indemnification Proceedings . . . . . . . . . 12 (d) Contribution . . . . . . . . . . . . . . . . . . . . . . 13 9. Rule 144. . . . . . . . . . . . . . . . . . . . . . . . . . . 14 10. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . 14 (a) Recapitalizations, Exchanges, etc. . . . . . . . . . . . 14 (b) Remedies . . . . . . . . . . . . . . . . . . . . . . . . 14 (c) Amendments and Waivers . . . . . . . . . . . . . . . . . 15 (d) Notices. . . . . . . . . . . . . . . . . . . . . . . . . 15 (e) Successors and Assigns . . . . . . . . . . . . . . . . . 16 (f) Counterparts . . . . . . . . . . . . . . . . . . . . . . 16 (g) Governing Law. . . . . . . . . . . . . . . . . . . . . . 16 (h) Headings . . . . . . . . . . . . . . . . . . . . . . . . 16 (i) Jurisdiction . . . . . . . . . . . . . . . . . . . . . . 17 (j) Severability . . . . . . . . . . . . . . . . . . . . . . 17 (k) Rules of Construction. . . . . . . . . . . . . . . . . . 17 (l) Headings; References . . . . . . . . . . . . . . . . . . 17 (m) Entire Agreement . . . . . . . . . . . . . . . . . . . . 17 (n) Further Assurances . . . . . . . . . . . . . . . . . . . 17 (o) Effectiveness. . . . . . . . . . . . . . . . . . . . . . 17 3 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT, dated as of April 26, 1994, among POLICY MANAGEMENT SYSTEMS CORPORATION, a South Carolina corporation (the "Company"), GENERAL ATLANTIC PARTNERS 14, L.P., a Delaware limited partnership ("GAP 14"), and GAP COINVESTMENT PARTNERS, a New York general partnership ("GAP Coinvestment"). Pursuant to a Stock Purchase Agreement, dated as of the date hereof, among GAP 14, GAP Coinvestment and INTERNATIONAL BUSINESS MACHINES CORPORATION, a New York corporation ("IBM") (the "Stock Purchase Agreement"), GAP 14 and GAP Coinvestment have agreed to purchase from IBM 1,519,024 shares of Common Stock, par value $.01 per share, of the Company ("Common Stock," and such shares of Common Stock are referred to herein as the "Purchased Common Stock"). In connection with the purchase of the Purchased Common Stock by GAP 14 and GAP Coinvestment pursuant to the Stock Purchase Agreement, each of them has entered into a Shareholders' Agreement, dated as of the date hereof, among the Company, GAP 14 and GAP Coinvestment (the "Shareholders' Agreement"), pursuant to which GAP 14 and GAP Coinvestment have granted to the Company rights of first offer and certain other rights, in each case, to the extent provided for therein. In order to induce GAP 14 and GAP Coinvestment to enter into the Shareholders' Agreement, the Company has agreed to provide registration rights with respect to the Registrable Securities (as hereinafter defined) as set forth in this Agreement. For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Definitions. As used in this Agreement, and unless the context requires a different meaning, the following terms have the meanings indicated: "Act" means the Securities Act of 1933, as amended. "Approved Underwriter" has the meaning assigned such term in Section 3(e). "Business Day" means any day other than a Satur- day, Sunday or other day on which commercial banks in the City of New York are authorized or required by law or executive order to close. 4 "Common Stock" has the meaning assigned such term in the second paragraph of this Agreement. "Company" has the meaning assigned such term in the first paragraph of this Agreement. "Company Approved Amount" has the meaning assigned such term in Section 4(a). "Company Underwriter" has the meaning assigned such term in Section 4(a). "Demand Registration" has the meaning assigned such term in Section 3(a). "Exchange Act" means the Securities Exchange Act of 1934, as amended. "GAP 14" has the meaning assigned such term in the first paragraph of this Agreement. "GAP Coinvestment" has the meaning assigned such term in the first paragraph of this Agreement. "Holder" has the meaning assigned such term in Section 2(b). "Holders' Counsel" means (a) with respect to any Demand Registration that has been requested pursuant to Section 3, counsel selected by the Initiating Holders holding a majority of the Registrable Securities held by all Initiating Holders being registered in such registration, and (b) with respect to a request for registration of Registrable Securities pursuant to Section 4, counsel selected by the Holders holding a majority of the Registrable Securities being registered in such registration. "IBM" has the meaning assigned such term in the second paragraph of this Agreement. "Indemnified Party" has the meaning assigned such term in Section 8(c). "Indemnifying Party" has the meaning assigned such term in Section 8(c). "Initiating Holders" has the meaning assigned to such term in Section 3(a). "NASD" has the meaning assigned such term in Section 6(a)(xv). "Person" means any individual, firm, corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, government (or an agency or 5 political subdivision thereof) or other entity of any kind, and shall include any successor (by merger or otherwise) of any such entity. "Purchased Common Stock" has the meaning assigned such term in the second paragraph of this Agreement. "Registrable Securities" means, subject to Section 2(a), (i) any shares of Purchased Common Stock, and (ii) any other shares of Common Stock of the Company acquired by GAP 14 and/or GAP Coinvestment in a manner consistent with and subject to the Shareholders' Agreement and (iii) any shares of capital stock issued or issuable in respect of shares of Purchased Common Stock or any other shares of Common Stock of the Company acquired by GAP 14 and/or GAP Coinvestment in a manner consistent with and subject to the Shareholders' Agreement by way of a stock dividend or stock split or in connection with a com- bination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. "Registration Expenses" has the meaning assigned such term in Section 7. "SEC" means the Securities and Exchange Commission. "Shareholders' Agreement" has the meaning assigned such term in the third paragraph of this Agreement. "Stock Purchase Agreement" has the meaning assigned such term in the second paragraph of this Agreement. "Total Securities" has the meaning assigned such term in Section 4(a). 2. Securities Subject to this Agreement. (a) Registrable Securities. For the purposes of this Agreement, Registrable Securities will cease to be Regis- trable Securities (i) when a registration statement covering such Registrable Securities has been declared effective under the Act by the SEC and such Registrable Securities have been disposed of pursuant to such effective registration statement or (ii) if such Registrable Securities have been sold pursuant to Rule 144 or otherwise in a transaction in which such shares may be resold in a transaction exempt from the registration requirements of the Act and the legend on the certificates representing such shares has been or is permitted to be removed. (b) Holders of Registrable Securities. A Person is deemed to be a holder of Registrable Securities (a "Holder") whenever such Person (i) is a party to this Agreement or a permitted assign under the Shareholders' Agreement (other than a Rule 144 purchaser) who agrees to be bound in writing by the terms and provisions of this Agreement and the Shareholders' 6 Agreement and (ii) owns of record Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons with respect to the same Registrable Securities, the Company shall act upon the basis of the instructions, notice or election received from the registered owner of such Registrable Securities. 3. Demand Registration. (a) Request for Demand Registration. Subject to Sections 3(b) and 3(d) hereof, the Holders holding at least a majority of the Registrable Securities held by all of the Holders (the "Initiating Holders") may request one registration (the "Demand Registration") of Registrable Securities under the Act and under the securities or blue sky laws of any United States jurisdiction designated by the Holders that request to register Registrable Securities in such registration. Notwithstanding the foregoing, the Company shall not be required to effect the Demand Registration (i) within the period beginning forty five (45) days before the estimated filing date of a registration statement filed by the Company on its own behalf covering a firm commitment underwritten public offering and ending on the later of (A) one hundred and twenty (120) days after the effective date of such registration statement and (B) the expiration of any lock-up period reasonably required by the underwriters, if any, in connection therewith; (ii) if such registration is for the lesser of 350,000 shares of Common Stock (appropriately adjusted for stock dividends, stock splits, reverse splits, combinations, recapitalizations and the like occurring after the date hereof) or 25% of the total number of shares of Registrable Securities owned by the Holders; (iii) if, in the written opinion of counsel to the Company, the shares to be registered may be resold in a transaction exempt from the Registration requirements of the Act, or a no-action letter of the staff of the SEC has been obtained to that effect, and the shares are freed from any and all restrictions on transfer under the Shareholders' Agreement; (iv) for a maximum of sixty (60) days if the Company is contemplating a material plan of financing or would be required to disclose information that it deems advisable not to disclose in a registration statement; (v) for a maximum of sixty (60) days if the Company cannot then comply with the financial disclosure requirements of the SEC in connection with such registration; provided that (recognizing that the Company is not on the date hereof in compliance with the SEC's financial reporting requirements) no Demand Registration will be initiated until three years of financial statements meeting such requirements have been filed with the SEC and the Company is otherwise in compliance with applicable SEC requirements. Any request for the Demand Registration by the Initiating Holders shall specify the amount of the Registrable Securities proposed to be sold, the intended method of disposition thereof and whether the request is for registration on Form S-3 (or any successor form thereto). Upon a request for the Demand Registration, the Company shall promptly take such steps as are reasonably necessary or appropriate to prepare for the registration of the Registrable 7 Securities to be registered. Within fifteen (15) days after the receipt of such request, the Company shall give written notice thereof to all other Holders and include in such registration all Registrable Securities held by a Holder from whom the Company has received a written request for inclusion therein at least ten (10) days prior to the filing of the registration statement. Each such request will also specify the number of Registrable Securities to be registered, the intended method of disposition thereof and whether the request is for registration on Form S-3 (or any successor form thereto). Unless the Initiating Holders holding the majority of the Registrable Securities held by all Initiating Holders to be included in the Demand Registration consent in writing, no other party (other than the Company or any other Holder), shall be permitted to offer securities under the Demand Registration. If the Company notifies the Initiating Holders that it intends to offer securities under the Demand Registration, the Demand Registration shall be deemed to be a Company-initiated registration statement with the Holders participating pursuant to their "piggy-back" rights under Section 4 hereof, and the right of the Holders to make a Demand Registration shall be restored. (b) Effective Demand Registration. A registra- tion shall not constitute the Demand Registration until it has become effective and remains continuously effective for not less than one hundred and twenty (120) days or until the shares registered therein have been sold, whichever is earlier. If a requested Demand Registration does not constitute the Demand Registration, the Holders shall continue to be entitled to request one Demand Registration under Section 3(a) hereof. The Company shall use its reasonable best efforts to cause the Demand Registration to become effective not later than ninety (90) days after it receives a request for the Demand Registration under Section 3(a). (c) Expenses. In any registration initiated as a Demand Registration, the Company shall pay all reasonable Registration Expenses in connection therewith, whether or not such requested Demand Registration becomes effective; provided, however, that, if a registration initiated as a Demand Registration does not become effective or remain effective for one hundred and twenty (120) days as provided in Section 3(b) above for reasons beyond the Company's control and the Company pays such Registration Expenses, the Holders of Registrable Securities included in any subsequent registration shall be required to pay all Registration Expenses for the next Demand Registration. (d) Underwriting Procedures. If the Initiating Holders holding a majority of the Registrable Securities held by all Initiating Holders so elect, the offering of such Registrable Securities pursuant to the Demand Registration shall be in the form of a firm commitment underwritten offering and the managing underwriter or underwriters selected for such offering shall be the Approved Underwriter selected in accordance with Sec 8 tion 3(e). In such event, if the Approved Underwriter advises the Company in writing that, in its opinion, the aggregate amount of such Registrable Securities requested to be included in such offering is sufficiently large to have a material adverse effect on the success of such offering, then (i) the Company shall include in the registration only the aggregate amount of the Registrable Securities that in the opinion of the Approved Underwriter may be sold without any such effect on the success of such offering and (ii) no Registrable Securities other than those owned by the Initiating Holders shall be included in such registration without the written consent of the Initiating Holders and any further reduction in the shares to be included in such registration shall be made pro rata among the participating Holders in proportion to the number of shares they own as of such date. (e) Selection of Underwriters. If the Demand Registration is in the form of an underwritten offering, the Initiating Holders holding a majority of the Registrable Securities held by all Initiating Holders to be included in the Demand Registration shall select and obtain an investment banking firm of national reputation to act as the managing underwriter of the offering (the "Approved Underwriter"); provided, that, the Approved Underwriter shall, in any case, be acceptable to the Company in its reasonable judgment and shall undertake to comply with Section 2.1(h) of the Shareholders' Agreement. 4. Piggy-Back Registration. (a) Piggy-Back Rights. If the Company proposes to file a registration statement under the Act with respect to an offering by the Company for its own account of any class of security (other than a registration statement on Form S-4 or S-8 (or any successor form thereto) under the Act), then the Company shall give written notice of such proposed filing to each of the Holders at least thirty (30) days before the anticipated filing date, and such notice shall describe in detail the proposed registration and distribution (including those jurisdictions where registration under the securities or blue sky laws is intended) and offer such Holders the opportunity to register the number of Registrable Securities as each such Holder may request. The Company shall use its reasonable best efforts to cause the managing underwriter or underwriters of an underwritten offering proposed by the Company (the "Company Underwriter") to permit the Holders who have requested to participate in the registration for such offering to include such Registrable Securities in such offering and, if the Company proposes to register Common Stock or any other securities of which the Registrable Securities are then comprised, such Registrable Securities shall be included in such offering on the same terms and conditions as the securities of the Company included therein. The Company Underwriter shall undertake to comply with the requirements of Section 2.1(h) of the Shareholders' Agreement. Notwithstanding the foregoing, if the Company Underwriter delivers a written opinion to the Company (with a copy provided to the Holders of Registrable Securities) 9 that the total amount of securities which such Holders and the Company intend to include in such offering (the "Total Securities") is sufficiently large so as to have a material adverse effect on the Company's offering, then the Company shall include in such registration the securities proposed to be offered for the account of the Company and, to the extent reasonably feasible, the Registrable Securities requested to be included in such registration (any such Registrable Securities to be registered for the accounts of the Holders are hereinafter referred to as the "Company Approved Amount"). Each Holder shall be entitled to have included in such registration Registrable Securities equal to its pro rata portion of the Company Approved Amount, as based on the amounts of Registrable Securities sought to be registered by the Holders in their requests for participa- tion in such registration. (b) Expenses. The Company shall bear all reasonable Registration Expenses in connection with any registration pursuant to this Section 4. 5. Holdback Agreements. (a) Restrictions on Public Sale by Holders. In order to participate in a registration effected hereby, to the extent not inconsistent with applicable law, each Holder agrees not to effect any public sale or distribution of any securities of the Company, including a sale pursuant to Rule 144 under the Act, during the period commencing with the notice of the proposed registration until one hundred and twenty (120) days after the effective date of such registration statement (except as part of such registration), if and to the extent requested by the Company in the case of a non-underwritten public offering, or if and to the extent requested by the Company Underwriter or the Approved Underwriter in the case of an underwritten public offering. (b) Restrictions on Public Sale by the Company. The Company agrees not to effect any public sale or distribution of any of its securities for its own account (except pursuant to registrations on Form S-4 or S-8 (or any successor form thereto) under the Act) during the ninety (90) day period commencing on the effective date of any registration statement in which the Holders are participating. 6. Registration Procedures. (a) Obligations of the Company. Whenever regis- tration of Registrable Securities has been requested pursuant to Section 3 or 4 of this Agreement, the Company shall use its reasonable best efforts to effect the registration and sale of such Registrable Securities in accordance with the intended method of distribution thereof as quickly as practicable, and in connection with any such request, the Company shall, as expeditiously as possible: 10 (i) prepare and file with the SEC (in any event not later than sixty (60) Business Days after receipt of a request to file a registration statement with respect to Registrable Securities) a registration statement on Form S-3 or a successor, or if the Company does not qualify for registration on such form, then on any form on which registration is requested for which the Company then qualifies, which counsel for the Company and Holders' Counsel shall deem appropriate and which shall be available for the sale of such Registrable Securities in accordance with the intended method of distribution thereof, and use its reasonable best efforts to cause such registration statement to become effective; provided, however, that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company shall (A) provide Holders' Counsel with an adequate and appropriate opportunity to participate in the preparation of such registration statement and each prospectus included therein (and each amendment or supple- ment thereto) to be filed with the SEC, which documents shall be subject to the review (but not right of clearance) of Holders' Counsel, and (B) notify Holders' Counsel and each seller of Registrable Securities pursuant to such registration statement of any stop order issued or to the Company's knowledge threatened by the SEC and take all reasonable action required to prevent the entry of such stop order or to remove it if entered; (ii) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than six (6) months or such shorter period which will terminate when all Registrable Securities covered by such registration statement have been sold (but not before the expira- tion of the ninety (90) day period referred to in Section 4(3) of the Act and Rule 174 thereunder, if applicable), and comply with the provisions of the Act with respect to the disposition of all Registrable Securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement; (iii) as soon as reasonably possible and subject to a reasonably appropriate confidentiality agreement, furnish to each seller of Registrable Securities, prior to filing a registration statement, copies of such registration statement as it is proposed to be filed, and thereafter such number of copies of such registration statement, each amendment and supplement thereto (in each case including all exhibits thereto), the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as each such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller; (iv) use its reasonable best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions within the 11 United States as any seller of Registrable Securities may request, and to continue such qualification in effect in each such jurisdiction for as long as is permissible pursuant to the laws of such jurisdiction, or for as long as any such seller requests or until all of such Registrable Securities are sold, whichever is shortest, and do any and all other acts and things which may be reasonably necessary or advisable to enable any such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller; provided, however, that the Company shall not be required to (A) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 6(a)(iv), (B) subject itself to taxation in any such jurisdiction or (C) consent to general service of process in any such jurisdiction; (v) use its reasonable best efforts to obtain all other approvals, covenants, exemptions or authorizations from such governmental agencies or authorities as may be reasonably necessary to enable the sellers of such Regis- trable Securities to consummate the disposition of such Regis- trable Securities; (vi) notify each seller of Registrable Securities at any time when a prospectus relating thereto is required to be delivered under the Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circum- stances under which they were made, and the Company shall promptly prepare a supplement or amendment to such prospectus and furnish to each such seller a reasonable number of copies of a supplement to or amendment of such prospectus as may be necessary so that, after delivery to the purchasers of such Registrable Securities, such prospectus shall not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made; (vii) enter into and perform customary agreements (including an underwriting agreement in customary form with the Approved Underwriter or Company Underwriter, if any, selected as provided in Section 3 or 4) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of such Registrable Securities; (viii) subject to a reasonably appropriate confidentiality agreement and solely for the purpose of meeting their legally required due diligence obligations, make available for inspection by the managing underwriter participating in any disposition pursuant to such registration statement, Holders' Counsel and any attorney retained by the managing underwriter, each of which shall be reasonably acceptable to the Company, such 12 information as shall be reasonably necessary to enable them to exercise their due diligence responsibility in connection with such registration statement; (ix) obtain a "cold comfort" letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by "cold comfort" letters, as Holders' Counsel or the managing underwriter reasonably request; (x) furnish, at the request of any seller of Registrable Securities on the date such securities are delivered to the underwriters for sale pursuant to such regis- tration or, if such securities are not being sold through under- writers, on the date the registration statement with respect to such securities becomes effective, an opinion, dated such date, of counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the seller making such request, covering such legal matters with respect to the registration in respect of which such opinion is being given as such seller may reasonably request and as are customarily included in such opinions; (xi) otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable but no later than fifteen (15) months after the effective date of the registration statement, an earn- ings statement covering a period of twelve (12) months beginning after the effective date of the registration statement, in a manner which satisfies the provisions of Section 11(a) of the Act; (xii) cause all such Registrable Securities to be listed on each securities exchange on which similar securi- ties issued by the Company are then listed, subject to the satis- faction of the applicable listing requirements of each such exchange; (xiii) keep each seller of Registrable Securities advised as to the initiation and progress of any registration under Section 3 or 4 hereunder; (xiv) provide officers' certificates and other customary closing documents; (xv) cooperate with each seller of Registrable Securities and each underwriter participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the National Association of Securities Dealers, Inc. (the "NASD"); and 13 (xvi) use its reasonable best efforts to take all other steps reasonably necessary to effect the registration of the Registrable Securities contemplated hereby. (b) Seller Information. As a condition to participation in any registration statement filed hereunder, the Company may require each seller of Registrable Securities as to which any registration is being effected to furnish to the Company in writing such information regarding the sellers and the distribution of such securities as the Company may from time to time reasonably request or as may reasonably be required by the Approved Underwriter or the Company Underwriter as the case may be, the SEC or applicable requirements of the Act or the Exchange Act. (c) Notice to Discontinue. Each Holder agrees that, upon receipt of any notice from the Company of the happen- ing of any event of the kind described in Section 6(a)(vi), such Holder shall forthwith discontinue disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Sec- tion 6(a)(vi) and, if so directed by the Company, such Holder shall deliver to the Company (at the Company's expense) by certified or registered mail or overnight courier all copies, other than permanent file copies then in such Holder's possession, of the prospectus covering such Registrable Securi- ties which is current at the time of receipt of such notice. If the Company shall give any such notice, the Company shall extend the period during which such registration statement shall be maintained effective pursuant to this Agreement (including, without limitation, the period referred to in Section 6(a)(ii)) by the number of days during the period from and including the date of the giving of such notice pursuant to Section 6(a)(vi) to and including the date when the Holder shall have received the copies of the supplemented or amended prospectus contemplated by and meeting the requirements of Section 6(a)(vi). 7. Registration Expenses. The Company shall pay all reasonable out-of-pocket expenses (other than underwriting discounts and commissions and the fees and charges of Holders' Counsel) arising from or incident to the performance of, or compliance with, this Agreement, including, without limitation, (a) SEC, stock exchange and NASD registration and filing fees, (b) all fees and expenses incurred in complying with securities or blue sky laws (including, without limitation, reasonable fees, charges and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities), (c) all printing, messenger and delivery expenses, and (d) the fees, charges and disbursements of counsel to the Company and of its independent public accountants and any other accounting and legal fees, charges and expenses incurred by the Company (including, without limitation, any expenses arising from any special audits incident to or required by any registration or qualification). All of the 14 expenses described in this Section 7 are referred to in this Agreement as "Registration Expenses." 8. Indemnification; Contribution. (a) Indemnification by the Company. In connection with any registration pursuant to Section 3 or 4 hereof, the Company agrees to indemnify and hold harmless each Holder, its directors, officers, partners, employees, advisors and agents, and each Person who controls (within the meaning of the Act or the Exchange Act) such Holder, to the extent permitted by law, from and against any and all losses, claims, damages, expenses (including, without limitation, reasonable costs of investigation and fees, disbursements and other charges of counsel) or other liabilities resulting from or arising out of or based upon any untrue, or alleged untrue, statement of a material fact contained in any registration statement, prospectus or preliminary prospectus or notification or offering circular (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such Holder expressly for use therein. The Company shall also indemnify any underwriters of the Registrable Securities, their officers, directors and employees, and each Person who controls any such underwriter (within the meaning of the Act and the Exchange Act) to the same extent as provided above with respect to the indemnification of the Holders of Registrable Securities. (b) Indemnification by Holders. In connection with any registration in which a Holder is participating pursuant to Section 3 or 4 hereof, each such Holder shall furnish to the Company in writing such information with respect to such Holder as the Company may reasonably request or as may be required by law for use in connection with any registration statement or prospectus to be used in connection with such registration and each Holder agrees to indemnify and hold harmless the Company, any underwriter retained by the Company and their respective directors, officers, employees, advisors and agents and each Person who controls (within the meaning of the Act and the Exchange Act) the Company or such underwriter to the same extent as the foregoing indemnity from the Company to the Holders (subject to the proviso to this sentence and applicable law), but only with respect to any such information furnished in writing by such Holder expressly for use therein; provided, however, that the liability of any Holder under this Section 8(b) shall be limited to the amount of the net proceeds received by such Holder in the offering giving rise to such liability. (c) Conduct of Indemnification Proceedings. Any Person entitled to indemnification hereunder (the "Indemnified Party") agrees to give prompt written notice to the indemnifying 15 party (the "Indemnifying Party") after the receipt by the Indemnified Party of any written notice of the commencement of any action, suit, proceeding or investigation or threat thereof made in writing for which the Indemnified Party intends to claim indemnification or contribution pursuant to this Agreement; provided, that, the failure so to notify the Indemnifying Party shall not relieve the Indemnifying Party of any liability that it may have to the Indemnified Party hereunder. The Indemnifying Party shall be entitled to participate in and, to the extent it may wish, jointly with any other Indemnifying Party similarly notified, to assume the defense of such action at its own expense, with counsel chosen by it and satisfactory to such Indemnified Party. The Indemnified Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be paid by the Indemnified Party unless (i) the Indemnifying Party agrees to pay the same, (ii) the Indemnifying Party fails to assume the defense of such action with counsel reasonably satisfactory to the Indemnified Party in its reasonable judgment, (iii) the named parties to any such action (including any impleaded parties) have been advised by such counsel that either (A) representation of such Indemnified Party and the Indemnifying Party by the same counsel would be inappropriate under applicable standards of professional conduct or (B) there may be one or more legal defenses available to it which are different from or addi- tional to those available to the Indemnifying Party. In either of such cases the Indemnifying Party shall not have the right to assume the defense of such action on behalf of such Indemnified Party. No Indemnifying Party shall be liable for any settlement entered into without its written consent, which consent shall not be unreasonably withheld. The rights accorded to any Indemnified Party hereunder shall be in addition to any rights that such Indemnified Party may have at common law, by separate agreement or otherwise. (d) Contribution. If the indemnification provided for in Section 8(a) and/or from the Indemnifying Party is unavailable to an Indemnified Party in respect of any losses, claims, damages, expenses or other liabilities referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages, expenses or other liabilities in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions which resulted in such losses, claims, damages, expenses or other liabilities, as well as any other relevant equitable considerations. The relative faults of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, was made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the Indemnifying Party's and Indemnified Party's relative intent, knowledge, access to information and 16 opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, expenses or other liabilities referred to above shall be deemed to include, subject to the limitations set forth in Sections 8(a), 8(b) and 8(c), any legal or other fees, charges or expenses reasonably incurred by such party in connection with any investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 8(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable con- siderations referred to in the immediately preceding paragraph. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution pursuant to this Section 8(d). 9. Rule 144. The Holders acknowledge that the Company is not as of the date hereof in compliance with its reporting requirements under the Exchange Act and rules and regulations adopted by the SEC thereunder. After the Company has come into compliance with such reporting requirements, the Company covenants that it shall from that date forward use its reasonable best efforts to file any reports required to be filed by it under the Exchange Act and the rules and regulations adopted by the SEC thereunder, and that it shall take such further action as each Holder may reasonably request (including, but not limited to, providing any information necessary to comply with Rules 144 and 144A under the Act), all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the Act within the limitation of the exemptions provided by (a) Rule 144 or Rule 144A under the Act, as such rules may be amended from time to time, or (b) any similar rules or regulations hereafter adopted by the SEC. The Company shall, upon the request of any Holder, deliver to such Holder a written statement as to whether the Company has complied with such requirements. 10. Miscellaneous. (a) Recapitalizations, Exchanges, etc. The provisions of this Agreement shall apply to any and all shares of capital stock of the Company or any successor or assign of the Company (whether by merger, consolidation, sale of assets or otherwise) which may be issued in respect of, in exchange for or in substitution of, the Purchased Common Stock of any other shares of Common Stock of the Company acquired by GAP 14 and/or GAP Coinvestment that are acquired in a manner consistent with and subject to the Shareholders' Agreement and that are not freely tradeable, and shall be appropriately adjusted for any stock dividends, splits, reverse splits, combinations, recapitalizations and the like occurring after the date hereof. (b) Remedies. The Company and the Holders, in addition to being entitled to exercise all rights granted by law, 17 including recovery of damages, shall be entitled to specific performance of their rights under this Agreement. (c) Amendments and Waivers. Except as otherwise provided herein, the provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions of such section may not be given unless the Company has obtained the prior written consent of Holders holding at least a majority of the Registrable Securities. (d) Notices. All notices and other communi- cations hereunder shall be in writing and shall be deemed given if telecopied or delivered personally or mailed by registered or certified mail (return receipt requested) to the following address (or at such other address as shall be specified by like notice; provided, that notice of a change of address shall be effective only upon receipt thereof): (i) if to GAP 14 or GAP Coinvestment: c/o GAP 14 Service Corporation 125 East 56th Street New York, New York 10022 Attention: Steven A. Denning Telephone: (212) 888-9191 Facsimile: (212) 644-8339 with a copy to: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019-6064 Attention: Matthew Nimetz, Esq. Telephone: (212) 373-3000 Facsimile: (212) 757-3990 (ii) if to the Company (two copies): Policy Management Systems Corporation One PMS Center Blythewood, South Carolina 29016 Attention: President; General Counsel Telephone: 803-735-4000 Facsimile: 803-735-5500 with a copy to: Dewey Ballantine 1301 Avenue of the Americas New York, New York 10019 Attention: Robert C. Myers, Esq. Telephone: 212-259-8000 Facsimile: 212-259-6000 18 (iii) if to any other Holder, at its address as it appears on the transfer books of the Company Any notice given by telecopier or delivered personally shall be deemed to have been received by the recipient thereof on the day delivered if actually received during normal business hours on a Business Day; otherwise, such notice shall be deemed received on the next following Business Day if actually received on such day. All other notices in accordance herewith shall be effective on the day actually received by the Company. Any party hereto may, by notice to the other parties hereto, change its address for receipt of notices hereunder. Each Holder hereby designates General Atlantic Service Corporation ("GASC") as its representative to receive any notice hereunder and to communicate with the Company on its behalf. The Company hereby acknowledges the designation of GASC as the representative of each Holder for purposes of this Section 10(e). Any notice given by the Company to GASC shall be deemed given to the Party to whom it is addressed, and any notice given to the Company by GASC on behalf of any Holder shall have the same effect as if given to the Company by such Party. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto. The registration rights and the other obligations of the Company contained in this Agreement shall, with respect to any Registrable Security, be automatically transferred from a Holder to any subsequent holder of such Registrable Security (including any pledgee), who or which consents in writing to the terms and provisions of this Agreement and the Shareholders' Agreement. If the Company receives conflicting instructions, notices or elections from two or more persons with respect to the same Registrable Securities, the Company shall act upon the basis of the instructions, notice or election received from the registered owner of such Registrable Securities. (f) Counterparts. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same instrument. (g) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely within such State, without regard to the principles of conflicts of law of such State. (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 19 (i) Jurisdiction. Each party to this Agreement hereby irrevocably agrees that any legal action or proceeding arising out of or relating to this Agreement or any agreements or transactions contemplated hereby may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York and hereby expressly submits to the personal jurisdiction and venue of such courts for the purposes thereof and expressly waives any claim of improper venue and any claim that such courts are an inconvenient forum. (j) Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, it being intended that all of the rights and privileges of the Company and the Holders shall be enforceable to the fullest extent permitted by law. (k) Rules of Construction. Unless the context otherwise requires, "or" is not exclusive, and references to sections or subsections refer to sections or subsections of this Agreement. (l) Headings; References. The headings appearing in this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. Except as otherwise indicated herein, all references herein to Sections refer to the Sections contained in this Agreement. (m) Entire Agreement. This Agreement embodies the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties, covenants or understanding, other than those set forth or referred to herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. (n) Further Assurances. Each of the parties shall execute such documents and perform such further acts as may be reasonably required or desirable to carry out or to perform the provisions of this Agreement. (o) Effectiveness. This Agreement shall be effective upon the purchase of the Purchased Common Stock by GAP 14 and GAP Coinvestment pursuant to the Stock Purchase Agreement, and if such purchase does not occur or on before September 30, 1994, this Agreement shall terminate and be of no force or effect. 20 IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of the date first above written. POLICY MANAGEMENT SYSTEMS CORPORATION By: G. Larry Wilson Chairman, President and Chief Executive Officer GENERAL ATLANTIC PARTNERS 14, L.P. By: GENERAL ATLANTIC PARTNERS Its General Partner By: Steven A. Denning Managing General Partner GAP COINVESTMENT PARTNERS By: Steven A. Denning Managing Partner EX-10 5 1 FORM OF EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT THIS EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT ("the Agreement") is made effective as of May 12, 1994 by and between &NAME& ("EMPLOYEE")and Policy Management Systems Corporation ("PMSC"). W I T N E S S E T H: WHEREAS, EMPLOYEE has been employed by PMSC in a position of significant responsibility and PMSC desires to recognize EMPLOYEE'S contribution to PMSC by making EMPLOYEE a "Key Employee" as defined in the Policy Management Systems Corporation 1989 Stock Option Plan ("Plan") and therefor eligible to be granted Options as defined therein; and WHEREAS, EMPLOYEE has developed and will continue to develop intimate knowledge of PMSC's business practices, which, if exploited by EMPLOYEE in contravention of this Agreement, could seriously, adversely and irreparably affect the business of PMSC; and WHEREAS, EMPLOYEE and PMSC each desire to induce the other to enter into this Agreement; and WHEREAS, PMSC would not make EMPLOYEE a Key Employee in the event that EMPLOYEE refused to agree to the terms and conditions of this Agreement and thus EMPLOYEE would not be eligible to receive Options under the Plan; NOW, THEREFORE, in consideration of the premises and the mutual promises and covenants of the parties hereto, EMPLOYEE and PMSC agree as follows: 1. Grant. Effective May 12, 1994, PMSC grants EMPLOYEE "non-qualified" Options to purchase up to &SHARES& shares of PMSC common stock pursuant to the Plan. Non-qualified options are subject to tax upon exercise as set forth in paragraph 5 below. THESE OPTIONS MAY BE REVOKED BY THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS IN THEIR ABSOLUTE DISCRETION, PRIOR TO THE TIME THEY BECOME EXERCISABLE IN ACCORDANCE WITH SECTION 9 OF THE PLAN IF THEY DEEM IT APPROPRIATE TO DO SO BASED UPON SUCH FACTS OR CIRCUMSTANCES AS THEY DEEM RELEVANT, INCLUDING, WITHOUT LIMITATION, THE RESULTS OR FINDINGS, WHETHER PRELIMINARY OR FINAL, OF THE VARIOUS INVESTIGATIONS INTO THE COMPANY'S PREVIOUSLY ISSUED FINANCIAL STATEMENTS. 2 2.Price and Expiration. The option price of the shares subject to these Options is the closing price of the stock on the New York Stock Exchange on the date of grant, i.e., thirty and one-quarter dollars ($30.25). These Options must be exercised within ten (10) years of the effective date of this Agreement or they expire. 3.Availability for Exercise. 33 1/3% of the shares subject to the Options granted will become available for exercise at the end of each of the three (3) years following the effective date of this Agreement. For example ... 33 1/3% of the total number of Options granted will be available for exercise beginning May 12, 1995; 66 2/3% will be available for exercise beginning May 12, 1996; and 100% will be available for exercise beginning May 12, 1997. Once Options become available for exercise, they will remain available for exercise for so long as EMPLOYEE is employed by the Company unless they expire. Notwithstanding the foregoing, the Options hereby granted shall not be exercisable until such time as the common stock to be issued on exercise of the Options has been registered under the Securities Act of 1933 or PMSC has otherwise qualified such issuance of shares under an exemption from registration under said Act. 4.Order of Exercise. The Options may be exercised without regard to the order in which these and any other Options were granted and without regard to any unexpired and unexercised qualified, Incentive Stock Options ("ISO's") or other non-qualified options. 5.Tax Liability. The tax liability which EMPLOYEE may incur relating to these Options is described below based upon present law and regulations which are subject to change. Taxes incurred are: + when options are granted - none + when options are exercised - the difference between the fair market value of the stock at the date of exercise of an Option and the option price is a capital gain but generally will be treated as ordinary income during the year the Option is exercised. Such tax liability is created at the time EMPLOYEE exercises an Option and PMSC is required to collect withholding taxes from EMPLOYEE. Federal income taxes (computed at a rate of 20% of the above described difference) and FICA and state income taxes (computed at the applicable rate of the above described difference) are withheld. For example...if the option price is $30.25 and the fair market value at the date of the exercise is $35.25, the difference is $5.00, and assuming an applicable FICA rate of 7.65% and state income tax rate of 7%, along with the 20% federal income tax, the Company would collect a tax of $1.73 per share from EMPLOYEE. + when shares are sold - the difference between the fair market value at the date of exercise (the $35.25 in the above example) and the price at which EMPLOYEE sells the stock is treated the same as above described during the year in which EMPLOYEE sells the stock purchased by exercise of his or her options. 3 6.Exercise and Payment. Exercises of Options shall only be handled pursuant to the Instructions set forth on the last page of this Agreement. To exercise these Options, EMPLOYEE shall make payment in full to PMSC for the option price of the shares to be purchased...plus the combined (federal, FICA and state) tax liability EMPLOYEE incurs. Such taxes paid to PMSC will be forwarded to the Internal Revenue Service and appropriate state tax commission and credited to EMPLOYEE in the same manner as the withholding tax on EMPLOYEE's salary. EMPLOYEE's actual tax will depend upon the overall tax rate calculated when EMPLOYEE prepares his or her tax returns. EMPLOYEE should consult a tax professional regarding questions about EMPLOYEE's actual tax liability. 7.Noncompetition. In consideration of the Options hereby granted, EMPLOYEE covenants and agrees that EMPLOYEE shall devote his or her best efforts to furthering the best interests of PMSC and that for the one (1) year period from the effective date hereof, and if EMPLOYEE separates from employment with PMSC for any reason within said one (1) year period, then for a one (1) year period from the date of such separation from employment, EMPLOYEE shall not "Compete" with PMSC. The region within which EMPLOYEE agrees not to Compete with PMSC is the United States, Canada and those countries in which PMSC has customers or clients as of the date of EMPLOYEE's separation from employment. For the purpose of this Agreement, the term "Compete" shall have its commonly understood meaning which shall include, but not be limited by, the following items with respect to PMSC's insurance application software licensing, data processing, consulting and information services businesses and any other businesses carried on by PMSC at the time of EMPLOYEE's separation from employment: (i) soliciting or accepting as a client or customer any individual, partnership, corporation, trust or association that was a client, customer or actively sought after prospective client or customer of PMSC during the twelve (12) calendar month period immediately preceding the date of EMPLOYEE's separation from employment; (ii) acting as an employee, independent contractor, agent, representative, consultant, officer, director, or otherwise affiliated party of any entity or enterprise which is competing with PMSC in offering similar application software or services to parties described in (i) above; or (iii) participating in any such competing entity or enterprise as an owner, partner, limited partner, joint venturer, creditor or stockholder (except as an equity holder holding less than a one percent (1%) interest). 8.Non-Hiring. During EMPLOYEE'S employment with PMSC and for a period of three (3) years after separation from such employment, EMPLOYEE agrees that EMPLOYEE shall under no circumstances hire, attempt to hire or assist or be involved in the hiring of any employee of PMSC either on EMPLOYEE'S behalf or on behalf of any other person, entity or enterprise. Also, for a similar period of time, EMPLOYEE agrees to not communicate to any such person, entity or enterprise the names, addresses or any other information concerning any employee of PMSC or any past, present or prospective client or customer of PMSC. 4 9.Equitable Relief. EMPLOYEE acknowledges (i) that EMPLOYEE'S skill, knowledge, ability and expertise in the business described herein is of a special, unique, unusual, extraordinary, and/or intellectual character which gives said skill, etc. a peculiar value; (ii) that PMSC could not reasonably or adequately be compensated in damages in an action at law for breach of this Agreement; and (iii) that a breach of any of the provisions contained in this Agreement could be extremely detrimental to PMSC and could cause PMSC irreparable injury and damage. Therefore, EMPLOYEE agrees that PMSC shall be entitled, in addition to any other remedies it may have under this Agreement or otherwise, to preliminary and permanent injunctive and other equitable relief to prevent or curtail any breach of this Agreement; provided, however, that no specification in this Agreement of a specific legal or equitable remedy shall be construed as a waiver of or prohibition against the pursuing of other legal or equitable remedies in the event of such a breach. 10.Breach of Agreement. EMPLOYEE agrees that in the event EMPLOYEE breaches any provision of this Agreement, PMSC shall be entitled, in addition to any other remedies it may have under this Agreement, to offset, to the extent of any liability, loss, damage or injury from such breach, any payments due to EMPLOYEE pursuant to his or her employment with PMSC. 11.Employment Understanding. This Agreement constitutes the entire agreement between the parties with regard to the subject matter hereof, and there are no agreements, understandings, restrictions, warranties or representations between the parties relating to said subject matter other than those set forth or provided for herein or in any Agreement Not To Divulge or employment agreement between PMSC and EMPLOYEE. It is understood that PMSC's and EMPLOYEE's relationship is one of "at will" employment unless EMPLOYEE and PMSC have entered into a written employment agreement which provides otherwise. This Agreement shall not affect, or be affected by, any employment agreement, if any, between PMSC and EMPLOYEE. 12.General. In the event that any provision of this Agreement or any word, phrase, clause, sentence or other portion thereof (including, without limitation, the geographical and temporal restrictions contained herein) should be held to be unenforceable or invalid for any reason, such provision or portion thereof shall be modified or deleted in such a manner so as to make this Agreement enforceable to the fullest extent permitted under applicable laws. All references to PMSC shall include its subsidiaries as applicable. This Agreement shall inure to the benefit of and be enforceable by PMSC and its successors and assigns. No provision of this Agreement may be changed, modified, waived or terminated, except by an instrument in writing signed by the party against whom the enforcement of such is sought. No waiver of any provision or provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. Headings in this Agreement are inserted solely as a matter of convenience and reference and are not a part of this Agreement in any substantive sense. This Agreement may be executed in two counterparts, each of which will take effect as an original and shall evidence one and the same Agreement. 13.Plan Controls. In the event of any discrepancy between this Agreement and the Plan as to the terms and conditions of the Options, the Plan shall control. 5 14.Governing Law. The terms of this Agreement shall be governed by and construed in accordance with the laws of the State of South Carolina. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the date first above written. POLICY MANAGEMENT SYSTEMS CORPORATION "PMSC" BY:_________________________________ Stephen G. Morrison Executive Vice President TITLE:______________________________ EMPLOYEE _____________________________________ (Signature) _____________________________________ (Type or Print Name) _____________________________________ (Date Signed by Employee) 6 INSTRUCTIONS FOR EXERCISE OF PMSC STOCK OPTIONS Contact Person: Lynn W. Dillard, Ext. 4303 4B3 Post Office Box Ten, Columbia, SC 29202 An exercise form must be obtained and properly filled out. The form and employee's check for the appropriate exercise price and withholding taxes (federal and state income taxes and FICA) must be delivered to the Contact Person. The Company does not deal with third parties concerning employee's exercise of his or her stock options. If an employee deals with a brokerage firm, a bank or any other third party, the employee shall be responsible to keep such party from impacting on the two-party transaction between the Company and the employee. This transaction solely consists of employee bringing Company the exercise form and his or her own check and after several days the Company giving employee a certificate for his or her shares of stock. The Company's stock transfer agent is located in New York. If desired, an employee may request and pay the charges for the certificate to be sent to the Company via Federal Express. The certificate will only be issued in the employee's name. Employees may only exercise a whole number of options as PMSC shall not direct the transfer agent to issue fractional shares. As an optionholder, an employee is entitled to request copies of the Company's Annual and Quarterly Reports. An employee will not receive such reports automatically as an optionholder. Additionally, reports are available upon request showing a complete list of employee's options outstanding, options available for exercise, cost per share, total costs, and expiration dates of options. An employee may wish to request these materials or information before exercising options by calling or writing the Contact Person. THESE INSTRUCTIONS ARE SUBJECT TO CHANGE WITHOUT NOTICE. 7 SCHEDULE OF PARTICULARS FOR NAMED EXECUTIVE OFFICERS RE: EMPLOYEE STOCK OPTION/NON-COMPETE AGREEMENT DATE: MAY 12, 1994 NAME SHARES G. Larry Wilson 50,000 David T. Bailey 35,000 Charles E. Callahan 35,000 Donald A. Coggiola 25,000 Robert L. Gresham 15,000 -----END PRIVACY-ENHANCED MESSAGE-----