-----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, cKzx9gCJNgJA+69MHR9J164eAenac4CqRuW1/Agj02jRwUApvXEWH07cLGawEtp0 gE2+u8hqaZZEriIBD/rQRg== 0000356226-94-000023.txt : 19941125 0000356226-94-000023.hdr.sgml : 19941125 ACCESSION NUMBER: 0000356226-94-000023 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19921231 FILED AS OF DATE: 19941123 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLICY MANAGEMENT SYSTEMS CORP CENTRAL INDEX KEY: 0000356226 STANDARD INDUSTRIAL CLASSIFICATION: 6411 IRS NUMBER: 570723125 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-10557 FILM NUMBER: 94561590 BUSINESS ADDRESS: STREET 1: ONE PMS CTR STREET 2: PO BOX TEN CITY: COLUMBIA STATE: SC ZIP: 29202 BUSINESS PHONE: 8037354000 10-K/A 1 PAGE <1> RESTATED - SEE "INTRODUCTORY NOTE". SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1992 Commission file number 0-10175 POLICY MANAGEMENT SYSTEMS CORPORATION (Exact name of registrant as specified in its charter) South Carolina 57-0723125 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) One PMS Center (P.O. Box Ten) 29016 (29202) Blythewood, S.C. (Columbia, S.C.) (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (803) 735-4000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, par value $.01 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X The aggregate market value of the voting stock held by non-affiliates of the registrant was $1,824,082,520 at March 1, 1993 based on the closing market price of the Common Stock on such date, as reported by the New York Stock Exchange. The total number of shares of the registrant's Common Stock, $.01 per share par value, outstanding at March 1, 1993 was 23,534,164. DOCUMENTS INCORPORATED BY REFERENCE (1) Specified sections of the registrant's 1992 Annual Report to stockholders are incorporated by reference in Part II hereof. (2) Specified sections of the registrant's 1993 Proxy Statement in connection with its 1993 Annual Meeting of Stockholders are incorporated by reference in Part III hereof. PAGE <2> INTRODUCTORY NOTE THE INFORMATION CONTAINED HEREIN HAS BEEN RESTATED IN NOVEMBER 1994 TO REFLECT ADJUSTMENTS RESULTING FROM SPECIAL AUDITS OF THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS (SEE NOTE 2 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS). UNLESS OTHERWISE STATED, HOWEVER, INFORMATION CONTAINED HEREIN IS AS OF DECEMBER 31, 1992. PART I ITEM 1. BUSINESS THE COMPANY ORGANIZATION AND GENERAL DEVELOPMENT Policy Management Systems Corporation ("Company") is a South Carolina corporation incorporated in 1980. Prior to incorporation, the Company operated as the PMS Division of Seibels, Bruce & Company, a wholly-owned subsidiary of The Seibels Bruce Group, Inc., an insurance holding company. At December 31, 1992, the Company had 4,363 full-time employees located in offices throughout North America, Europe and Australia. The Company is currently a leading provider of standardized insurance software systems and automation and administration support and information services to the insurance industry. Prior to 1985, the Company operated primarily as a provider of insurance software systems and related automation support services to property and casualty insurance companies. Since that time, the Company has broadened its software product and services offerings and the marketplace which it serves through the introduction of new internally developed products and services and business and software product acquisitions. In 1985, the Company began offering certain information services to assist underwriters and claims professionals in the property and casualty insurance marketplace. Since then, the Company has expanded its operations and information services offerings to the point that it now offers a full range of information services and related data base products to the entire insurance industry. In 1986, the Company took its initial step toward becoming a major supplier of automation solutions to providers of life and health insurance by offering software systems and related automation support services designed specifically for the group insurance products of these organizations. Since then, the Company has continued to expand its product and services offerings to this market and is currently recognized as a leader in providing automation solutions to providers of individual and group life and health insurance and managed care, with over 140 customers in that marketplace. PAGE <3> During the early stages of the Company's development, a major portion of the Company's revenues were derived from systems licensing activities (43.7% in 1985). As the Company has continued to enhance its position as a provider of a full range of business solutions, based upon automation, administration support and information, to the entire insurance industry, the portion of the Company's revenues derived from systems licensing activities has steadily declined, representing only 14.9% of total revenues in 1992. The remainder of the Company's revenues are derived primarily from automation and administration support and information services activities. The Company has always employed a business strategy of emphasizing stability of revenues by building a larger base of recurring systems licensing and services revenues. As a result of this emphasis, initial license charges, that portion of license charges from systems licensing activities which is recognized as revenue upfront upon execution of a license obligation and delivery of the product, have continually declined, representing only 5.6% of total revenues in 1992, compared to 16.4% in 1985. Prior to 1989, the Company and International Business Machines Corporation ("IBM") had worked together under various business arrangements (formal and informal). In 1989, the relationship was strengthened through the acquisition of a 19.8% minority equity interest in the Company for $116.8 million by IBM (see Note 8 of Notes to Consolidated Financial Statements). As part of this transaction and through subsequent additional agreements, IBM and the Company work closely together to develop and market automated solutions for the insurance industry. The Company is currently the only company recognized by IBM as an IBM Insurance Applications Affiliate. This business relationship with IBM has and will continue to enable the Company to expand more rapidly to meet the growing needs of the insurance industry. SEGMENT INFORMATION The Company operates in one business segment, the providing of computer software systems and automation and administration support and information services to the insurance industry. With the exception of the Company's motor vehicle reports service, which is provided as part of its information services offerings and accounted for 14%, 16% and 17% of total revenues in 1992, 1991 and 1990, respectively, no one product or service of the Company accounted for more than 10% of total revenues. See Marketing and Customers for revenues pertaining to geographical area. PAGE <4> PRODUCTS AND SERVICES The Company offers over 125 business solutions, which include more than 90 application software systems and a wide range of outsourcing, professional and information services, designed to meet the needs of all sectors of the insurance industry. The Company's primary software systems run on medium and large scale IBM computers utilizing most IBM operating systems. In addition, a number of systems run on intelligent workstations. Most customers licensing the Company's software systems use the Company's professional services, which are separately charged for and normally provided under separate agreements. Many customers using the Company's information services do not license the Company's software products. Over 100 customers currently utilize the Company's various outsourcing services, which are provided under contracts having terms up to ten years. SOFTWARE PRODUCTS The Company's software products automate most insurance processing functions, as well as various accounting, financial reporting and cash management functions of insurance organizations. The systems have been designed to permit ease of use and provide flexibility in adapting them to a particular customer's requirements and modifying them as business conditions change. The systems are modular in structure and facilitate the application of updates and enhancements and interfacing and integration of the different systems. Most of the systems will operate on either a stand-alone basis or in conjunction with each other. The architecture and technologies contained in the Company's software products have undergone dramatic change during the past several years as the various functions contained in these products have and continue to be adapted to the Company's new generation of integrated systems currently under development, Series III. Series III technologies will serve as the platform for the Company's systems for all sectors of the insurance industry for the next several years. A primary objective of Series III is the full integration of the information and data gathering, processing, underwriting, claims handling and reporting processes for providers of all types of insurance to create a true cooperative processing environment where insurance professionals, using advanced intelligent workstations, can process multiple tasks concurrently with minimal clerical support and data entry. The foundation of Series III is the Company's Integrated Application Platform ("IAP"), more fully described below. IAP facilitates the development of systems complying with IBM's Systems Application PAGE <5> Architecture ("SAA"), which provides consistent standards for technology, programming, communications and system interfaces and enables portability across and connectivity to multiple computing platforms. Series III uses advanced and emerging technologies such as relational data bases, digitized voice, expert systems and imaging. Series III technologies allow system upgrades, additions and interfaces to be implemented much quicker and at reduced costs, with a minimum of disruption to ongoing operations. Using relational data bases and cooperative processing between hardware platforms and allowing access to data from multiple sources through advanced networks, Series III provides a seamless flow of information between insurance agents, branch offices and home office insurance companies. Although development efforts for the initial full release of Series III for all sectors of the insurance industry will continue through 1995, major components of Series III have been delivered since development began in 1987. The BCMS, BCWS, MIS, MWS, MDS, MMS, UWS, UMS, CHS, CWS, LWS, PDSS, AIS, CIS, CIWS, WIP, FMS and IAP systems described below include Series III technologies. The Company currently has 63 Series III customers (property and casualty, life and health, large and small and domestic and foreign) who have licensed various Series III components. The following is a detailed description of the Company's current principal software products: POLICY MANAGEMENT SYSTEM ("PMS") - PMS, the Company's most comprehensive and widely used mainframe system, performs the functions essential to all phases of the management of property and casualty insurance policies. This system, which supports all lines of business written by property and casualty insurance companies, is designed to reduce paper work dependency, facilitate rapid access to information and improve service. Principal automated functions performed by PMS are policy rating and premium calculation, policy printing, renewal and endorsement generation, claims administration and management, billing and collection and certain reinsurance processing. ADVANCED PROCESSING SYSTEM ("APS") - APS is designed to run on IBM's AS/400 computer, providing the basic systems functions (including policy, claims and financial management and reporting) essential to property and casualty insurance companies with annual direct written premiums of up to approximately $100 million. BILLING AND COLLECTION MANAGEMENT SYSTEM ("BCMS") - BCMS facilitates efficient management of billing and receivables for all types of insurance policies on both an individual and PAGE <6> consolidated basis. The system features user defined pay plans, finance and service charges and delinquency plans and supports payroll deduction plans. BILLING AND COLLECTION WORKSTATION ("BCWS") - An intelligent workstation based system designed for use in conjunction with BCMS to capture, maintain, and display billing information. INSURANCE MANAGEMENT INFORMATION SYSTEM ("IMIS") - A management information and reporting system that provides premium, loss experience, reinsurance and actuarial reporting to satisfy insurance company management and statutory reporting requirements for property and casualty insurance companies. MANAGEMENT INFORMATION SYSTEMS ("MIS") - An on-line system that provides data generation and manipulation capabilities to fulfill the management, annual statement, actuarial, bureau, and other reporting requirements of all types of insurance companies. MANAGEMENT WORKSTATION ("MWS") - An intelligent workstation based system designed for use in conjunction with MIS to capture and display management information. MANAGEMENT DECISION SUPPORT ("MDS") - MDS provides insurance professionals with the capability to design and run queries against information contained in relational data bases and allows on-line access to current and historical versions of various standard reports. MICRO MAINFRAME SYSTEM ("MMS") - An intelligent workstation based system designed to meet the full policy processing and rating needs of property and casualty insurance companies. MMS emulates mainframe functions on a workstation allowing the maintenance of software rating applications that run in either a mainframe or workstation environment. UNDERWRITING WORKSTATION ("UWS") - An intelligent workstation based system which provides a seamless flow of underwriting information throughout an insurance organization and fully automates the rate, quote, and policy issuance processes with no need for manual intervention. UNDERWRITING MANAGEMENT SYSTEM ("UMS") - An integrated system providing the capability to store and manage policy information in a central location to facilitate the accuracy and consistency of underwriting decisions. CLAIMS HANDLING SYSTEM ("CHS") - An intelligent workstation based system which automates most claims handling related functions of property and casualty insurance PAGE <7> companies, including claims payments, and facilitates the uploading and downloading of claims information between host and remote computers. CLAIMS WORKSTATION ("CWS") - An intelligent workstation based system that completely automates the claims handling processes, as well as providing access to the various claims functions and information in a distributed environment. PMS/LIFE - A comprehensive system designed foradministration of individual life, annuity and health insurance policies. LIFE WORKSTATION ("LWS") - LWS provides data entry,editing, premium calculation, information retrieval and document preparation support for individual life and health insurance products. PRODUCT DEVELOPMENT SUPPORT SYSTEM ("PDSS") - PDSS facilitates and expedites the development of new and modification of existing life and health insurance products by centralizing product rules and information into a building block format for easy, timely access and manipulation. Once product rules and information are input, they can be used for a number of different products. GROUP ADMINISTRATION SYSTEM ("GROUP COMM") - A group insurance administration system that automates and consolidates most functions relating to new business and policy maintenance, billing and collection, premium accounting, commissions and reinsurance. CLAIMS ADMINISTRATION AND PAYMENT SYSTEM ("CAPS") - CAPS facilitates the administration and payment of claims covered under most health insurance plans. CAPS, with advanced capabilities supporting the cost management and extensive data collection needs of most health insurers, is utilized primarily by large health insurance companies and Blue Cross and Blue Shield organizations. CLAIMS ADMINISTRATION SYSTEM ("CAS II") - CAS II supports health insurance cost management programs, such as Preferred Provider Organizations, precertifications and second surgical opinions, and offers easy-to-use processing for claims covered under most health insurance plans. GROUP ADMINISTRATION AND BILLING SYSTEM ("ADMIN") - A group health insurance billing and administration system which automates and integrates membership, premium calculation, billing and collection, receivables, arrears and information management. This product is used primarily by large health insurance companies and Blue Cross and Blue Shield organizations. PROVIDER ADMINISTRATION AND REIMBURSEMENT SYSTEM ("PA&R") - A system designed to assist group health insurers in tracking health PAGE <8> care costs and expenses by provider and facilitate reimbursement thereof. MULTIPLE OPTION SOLUTION ("MOS") - A comprehensive series of systems designed for complete administration and management of most indemnity and managed care health products. AUTOMATED INFORMATION SYSTEM ("AIS") - An integrated information order, delivery, evaluation, and management platform featuring a mainframe data base that can be accessed by terminals or intelligent workstations via cooperative processing. AIS allows users to access information designed to facilitate the insurance underwriting and claims settlement process from multiple vendors. CLIENT INFORMATION SYSTEM ("CIS") - A system which serves as a common repository of information relating to an insurance company's clients and provides an index to other corporate data. CIS bridges computer systems, regardless of the software product and vendor, and displays all business relationships that exist between the client and the insurance company. CLIENT INFORMATION WORKSTATION ("CIWS") - An intelligent workstation based system that captures and displays information about any person, company, prospect or provider who has a relationship with an insurance company. WORK IN PROCESS ("WIP") - WIP facilitates the management, including tracking, assigning, reassigning and controlling, of all tasks generated in an insurance company environment. CORPORATE INVESTMENT MANAGEMENT SYSTEMS ("CIMS") - A series of investment systems designed for managing complex investment portfolios which handles most types of securities and includes portfolio segmentation, asset valuation and complete accounting control capabilities. These systems, which will operate on a stand-alone basis or in conjunction with each other, may be used by all types of insurance companies. FINANCIAL MANAGEMENT SYSTEM ("FMS") - An integrated accounting and financial reporting system which includes general ledger and budgeting capabilities, distribution of income and expense data by categories and the preparation of a variety of financial and accounting reports. INTEGRATED APPLICATION PLATFORM ("IAP") - A technicalplatform which, using cooperative processing technologies, provides the capability to develop applications and link software systems, whether they be those of the Company or another party, that take advantage of IBM's Systems Application Architecture ("SAA"). PAGE <9> SERVICES The following is a detailed description of the Company's current principal services offerings: OUTSOURCING SERVICES - The Company offers a full complement of outsourcing services from its four shared data centers located in Columbia, Dallas, London and Sydney, Australia. These services range from providing processing capabilities for unique, highly regulated lines of business such as Massachusetts automobile, Texas personal lines and automobile assigned risk plans; to providing complete processing capabilities for all or most of a customer's business by making available software systems licensed from the Company on a remote basis; to assuming complete systems management, processing and administration support responsibilities for a customer, including complete policyholder services and claims support. INFORMATION SERVICES - The Company offers a wide range of information services which are packaged to facilitate efficient review and use and may be ordered and received on an automated basis through the Company's nationwide telecommunications network using the Company's database products. These information services, which are designed to assist insurance professionals in making better decisions about risk selection, pricing and claims settlement, currently include motor vehicle (driving record) reports, undisclosed driver information, driver mileage verification, claims histories, credit reports and histories, property inspection and valuation reports, property claims estimating, premium audits, physician reports and medical histories. PROFESSIONAL SERVICES - In addition to the services described above, the Company offers a full range of professional services to assist customers in attaining the most effective use of their systems. These services include systems implementation and integration assistance and consulting and education. PAGE <10> MARKETING AND CUSTOMERS The Company markets its products and services to approximately 3,200 property and casualty insurance companies, over 6,000 life and health providers and independent agents and adjusters in the United States and Canada. In addition, the Company offers its software products and automation and administration support services in 23 foreign countries. At December 31, 1992, the Company was providing its information services to more than 9,000 insurance companies, agents and adjusters and had a total of 3,183 software systems licenses in force. No individual customer accounted for more than 10% of total revenues in any of the three years ended December 31, 1992. The Company markets its products and services through a staff of 180 employees, including salesmen and marketing support personnel, most of whom are specialists in the insurance industry and data processing. The Company's marketing force works extensively with each prospective customer, analyzing its specific requirements. Consequently, this process may extend over several months for a prospective customer looking for a major automation, administration support or information solution. In addition to its own software products, the Company markets certain software products of other parties to its customers. Typically, these products are designed to perform noninsurance specific functions or to improve the control and productivity of computer resources. The majority of the Company's revenues are generated from products and services provided in the United States. The following table illustrates the relative percentages of total revenue represented by the Company's products and services in the United States and foreign countries. Percent of Revenue Year ended December 31, 1992 1991 1990 (Restated) (Restated) (Restated) United States............ 84.5 88.3 89.3 Canada................... 3.5 3.6 4.3 Europe................... 8.3 5.7 5.5 Asia..................... 3.7 2.4 .9 Pursuant to a Development and Marketing Agreement entered into between the Company and IBM in connection with IBM's acquisition of an equity interest in the Company in 1989 and later expanded upon (see Note 8 of Notes to Consolidated Financial Statements), IBM, in addition to providing the Company with certain assistance in developing certain of its software products (see Product Development), works with the Company in identifying and developing PAGE <11> additional software applications for the insurance industry, offering combined software and services solutions to mutual customers and establishing joint sales and marketing programs to promote applications software and services to the insurance industry, particularly in the international and large company marketplace. This close relationship with IBM has and will continue to assist the Company in accelerating the development and marketing of its products and services worldwide. PAGE <12> LICENSING The Company's revenues are generated primarily by licensing to customers standardized insurance software systems and providing automation, administrative and information services to the insurance industry. Software systems are licensed under the terms of substantially standard nonexclusive and nontransferable license agreements, which generally have a noncancelable minimum term of six years and provide for an initial license charge and a monthly license charge. The initial license charge grants a right to use the software system available at the time the license is signed. The monthly license charge provides access to Maintenance, Enhancements and Services Availability ("MESA"). Under the maintenance provisions of MESA, the Company provides telephone support and error correction to current versions of licensed systems. Under the enhancement provisions of MESA, the Company will provide any additions or modifications to the licensed systems, which the Company may deliver from time to time to licensees of those systems if an when they become generally available. Services availability allows customers access to professional services, other than maintenance and enhancements, which are provided under separate arrangements during the MESA term. The Company provides professional support services, including systems implementation and integration assistance and consulting and educational services, which are available under services agreements and charged for separately. These services are generally provided under time and material contracts and in some circumstances under fixed price arrangements. The Company also offers information and outsourcing services ranging from making available software licensed from the Company on a remote processing basis from the Company's data centers, to automated information services through the Company's North America telecommunications network using the Company's database products. Outsourcing services are typically provided under contracts having terms from three to ten years. PAGE <13> COMPETITION The computer software and services industry is highly competitive. Based upon its knowledge of the industry, the Company believes it is a leading provider of comprehensive insurance software systems and automation and administration support and information services to the insurance industry. Competition is on the basis of service, price and technological advances. Property and casualty insurers who internally develop systems similar to those of the Company, along with their affiliates, are not likely to become customers of the Company. To the Company's knowledge, no such in-house systems are being marketed to other companies. There are certain providers of life and health insurance who have internally developed systems similar to those of the Company and market these systems to other companies. There are also a number of independent companies who offer software systems which perform one or more of the functions performed by the Company's systems. There are a number of larger companies, including computer manufacturers, computer service and software companies and insurance companies, who have greater financial resources than the Company and the technological ability to develop software products similar to those offered by the Company. There are a number of companies who provide information services similar to those provided by the Company to the insurance industry. These companies, especially the larger ones, present a significant competitive challenge to the Company's information services business growth, but the Company believes that it can meet this challenge through its knowledge of the insurance industry and its ability to meet the customer's needs. The Company believes that the most important considerations for potential consumers of its products and services are product capability, ease of installation and use, reliability and quality of technical support, documentation and training, integration of the products and services capabilities and the experience and financial stability of the Company. PAGE <14> PRODUCT DEVELOPMENT The history of the automated data processing industry has seen rapid changes in hardware and software technology. The Company must maintain the usefulness of its products and services, as well as modify and enhance them to accommodate changes to, and to insure compatibility with, hardware and software. To date, the Company has been able to adapt its products to such changes, and the Company believes that it will be able to do so in the future. The Company must continually ensure that its products meet the needs of its customers in the ever-changing marketplace. Accordingly, the Company has continually enhanced, improved, adapted and added new features to its products, in addition to developing new, additional products. An example of the Company's continuing product development efforts to ensure that it is in a position to meet the growing automation needs of the insurance industry is the Company's new generation of systems, Series III (see Products and Services, Software Products). The Company's efforts on Series III development have been further enhanced by IBM, pursuant to the Development and Marketing Agreement between the Company and IBM (see Marketing and Customers), providing the Company with certain machines, programs and services to assist in the continuance of the Company's conversion of its major insurance industry applications software to IBM's System Applications Architecture ("SAA") requirements and the development of other SAA based insurance industry applications software. In an effort to maintain and strengthen its competitive position, the Company expends substantial amounts on internal product development. Expenditures for internal product development, which were capitalized, were $24.3 $28.7 and $27.8 million in 1992, 1991 and 1990, respectively, representing 5.0%, 7.0% and 8.1%, respectively, of total revenues. In addition to its continuing development efforts, the Company has, in the past several years, expended significant amounts on business and software product acquisitions in an effort to expand its product and services offerings and its presence in the marketplace. The Company acquired software products with a cost basis of $17.7, $1.6 and $1.8 million in 1992, 1991 and 1990, respectively, representing 3.5%, .4% and .5%, respectively, of total revenues. The Company intends to continue to expand its product and services offerings through internal development and acquisitions. PAGE <15> ITEM 2. PROPERTIES The Company owns its Columbia, South Carolina, headquarters complex and 145 acres of land on which the facility is located. In early 1993, the Company completed construction of a 176,000 square foot addition to its corporate headquarters costing $16.2 million. The Company leases space for its regional and branch offices under various leases. See Notes 3 and 4 of Notes to Consolidated Financial Statements. The Company, throughout its data centers located in North America, Europe and Australia, utilizes 16 large to small-scale mainframe computers. All computers are owned or held under long-term leases. In total, these computers have 3,814 megabytes of memory and are capable of processing approximately 458.2 million instructions per second. The Company is currently utilizing 80% to 85% of this capacity. See Notes 3 and 4 of Notes to Consolidated Financial Statements. The Company relies upon contract, intellectual property, copyright and other bodies of law to protect its products as trade secrets and confidential proprietary information. The Company's license agreements restrict disclosure to third-parties and the use of its systems by customers to their own operations. The Company also informs each of its employees of the proprietary nature of its products and obtains an agreement not to disclose proprietary information. Notwithstanding those restrictions, it may be possible for competitors of the Company to obtain copies of its products. The Company actively attempts to protect its trade secrets and rigorously enforces the nondisclosure provisions of its license agreements. The Company has registered service marks or pending applications for registration for all of its primary software products. ITEM 3. LEGAL PROCEEDINGS The Company has no material pending nor threatened litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PAGE <16> EXECUTIVE OFFICERS OF THE REGISTRANT Name Age Position G. Larry Wilson 46 Chairman of the Board, President and Chief Executive Officer David T. Bailey 46 Executive Vice President Charles E. Callahan 44 Executive Vice President Donald A. Coggiola 53 Executive Vice President Robert L. Gresham 50 Executive Vice President, Secretary and Treasurer Bernard C. Mazon 43 Executive Vice President Jeffrey S. Bragg 44 Senior Vice President James P. Brown 46 Senior Vice President and General Counsel G. Larry Wilson - President and Chief Executive Officer of the Company since 1980 and Chairman of the Board (since 1985). Has had overall responsibility for management of the Company since its inception. Director of The Seibels Bruce Group, Inc., Columbia, South Carolina. David T. Bailey - Executive Vice President (since 1986). Responsible for the Property and Casualty Insurance Group. Employed by the Company since 1981. Charles E. Callahan - Executive Vice President (since 1989). Responsible for the Life Insurance Group. Employed by the Company since 1983. Donald A. Coggiola - Executive Vice President (since 1986). Responsible for the Industry Markets Group. Employed by the Company since 1979. Robert L. Gresham - Executive Vice President, Secretary and Treasurer (since 1986). Responsible for the Operations Group. Employed by the Company since 1978. Bernard C. Mazon - Executive Vice President (since 1990). Responsible for the Health Insurance Group. Employed by the Company since 1987. Jeffrey S. Bragg - Vice President (1987 to January 1993) and Senior Vice President (since January 1993). Responsible for the Insurance Services Group. Employed by the Company since 1987. James P. Brown - General Counsel (since 1986) and Senior Vice President (since January 1992). Employed by the Company since 1982. PAGE <17> PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's common stock is traded on the New York Stock Exchange, symbol PMS. The Company has never paid or declared a cash dividend on its common stock. The following table sets forth for the calendar periods indicated the high and low market prices for the Company's common stock. 1992 High Low First Quarter................................ $73 $63 Second Quarter............................... 70 5/8 59 3/4 Third Quarter................................ 76 1/2 62 5/8 Fourth Quarter............................... 83 1/2 71 1/2 1991 High Low First Quarter................................ $52 $39 3/8 Second Quarter............................... 51 43 3/8 Third Quarter................................ 55 1/2 47 1/4 Fourth Quarter............................... 66 3/8 51 3/4 Title of Class Common Stock, $.01 par value Number of Record Holders as of March 31, 1993 1,327 PAGE <18> ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (Unaudited) (Unaudited) (Unaudited) (Restated) (Restated) (Restated) (Restated) Results of Operations 1992 1991 1990 1989 (In Thousands, Except Per Share Data) Revenues........................$489,261 $411,156 $341,692 $262,271 Operating income................ 78,971 63,659 51,207 43,046 Other income and expenses, net.. 11,792 9,117 4,222 2,257 Income before income taxes...... 90,763 72,776 55,429 45,303 Net income......................$ 61,522 $ 47,596 $ 37,166 $ 29,741 Net income per share............$ 2.65 $ 2.21 $ 1.92 $ 1.77 Fully diluted net income per share.................... - $ 2.14 $ 1.80 $ 1.66 Financial Condition Cash and equivalents and marketable securities...... $238,522 $197,414 $152,994 $143,834 Working capital............... 286,687 232,245 200,098 193,808 Total assets.................. 706,942 632,692 529,249 476,580 Long-term debt and capital lease obligations.......... 6,001 5,976 102,633 103,151 Total liabilities............. 127,866 132,813 201,841 188,631 Stockholders' equity.......... 579,076 499,879 327,408 287,949 The above data should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing in this Annual Report on Form 10-K. PAGE <19> ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The consolidated balance sheet as of December 31, 1992 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended have been audited and are restated herein. The consolidated balance sheet as of December 31, 1991, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended December 31, 1991 and 1990 have been restated by the Company, without audit, to conform to the adjustments to the Company's retained earnings as of December 31, 1991, as discussed in Note 2 of Notes to Consolidated Financial Statements. These adjustments include all adjustments which are, in the opinion of management, necessary to state fairly the results for the periods presented. Results of Operations Set forth below are certain operating items expressed as a percentage of revenues and the percent increase for those items from the previous year. Percentage of Revenues Percent Increase 1992 1991 1990 1992 1991 1990 Revenues............ 100.0% 100.0% 100.0% 19.0% 20.3% 30.3% Operating income.... 16.1% 15.5% 15.0% 24.1% 24.3% 19.0% Income before income taxes...... 18.6% 17.7% 16.2% 24.7% 31.3% 22.4% Net income.......... 12.6% 11.6% 10.9% 29.3% 28.1% 25.0% Revenues Total licensing revenues were $73.0, $76.0 and $70.4 million in 1992, 1991 and 1990, respectively, representing 14.9%, 18.5% and 20.6% of total revenues. Total licensing revenues for 1992 decreased $3.0 million (3.9%) compared to 1991, due primarily to a reduction in initial license revenues ($6.4 million) related primarily to a decrease in the property and casualty insurance systems business. This decrease was partially offset by increased revenues from continuing monthly license charges for maintenance, system enhancements and services availability ("MESA") and for continuing right-to-use licenses of $3.4 million (8.1%) compared to 1992. Total licensing revenues for 1991 increased $5.6 million (8.0%) compared to 1990, due primarily to an increase in initial license charges ($3.5 million), and an increase in MESA revenue ($2.1 million) related primarily to both the health and life insurance systems businesses. Total services revenues were $416.3, $335.2 and $271.3 million in 1992, 1991 and 1990, respectively, representing 85.1%, 81.5% and PAGE <20> 79.4% of total revenues. Changes in the total services revenue were affected by activities in professional, outsourcing and information services, as described more fully below. Total revenues from professional and outsourcing servces for 1992 were $256.9 million as compared with $185.9 million for 1991. This $71.0 million increase is primarily attributable to policy management and processing services to the New Jersey Market Transition Facility (MTF) project, facilities management and outsourcing contracts in Europe and Australia and several new outsourcing contracts in the United States. Revenues from professional and outsourcing services increased $26.5 million for 1991 compared to 1990. This increase was primarily attributable to policy management and processing services to the MTF project and to an increase in professional services for both the life and health insurance systems businesses. Revenues from information services were $154.8, $147.3 and $109.2 million for 1992, 1991 and 1990, respectively. The increase between these years is primarily attributable to the acquisition of PMS, Inc. (PMSI) of Waco, Texas, effective November 1, 1990 and to an increase in new business associated with automobile property and casualty information services. PMSI provides information services, particularly attending physician statements and personal medical history interviews primarily to life insurers throughout the United States. Increases related to this acquired business were $7.2 and $34.2 million for 1992 and 1991, respectively. 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 expense increased $10.9 million for 1992 compared to 1991, primarily as a result of increased costs associated with European and Australian facilities management and outsourcing contracts. The increase in employee compensation and benefits expenses of $15.6 million for 1991 compared to 1990 results primarily from the acquisition of PMSI, effective November 1, 1990. Computer and communications expenses increased $8.9 million for 1992 compared to 1991 and $3.5 million for 1991 compared to 1990. These increases were primarily related to increased costs associated with policy management and processing services, principally the MTF project and to European and Australian facilities management and outsourcing contracts. Information services and data acquisition costs increased $13.5 million to $92.8 million for 1992 compared to $79.3 million for 1991. The 1991 total reflects an increase of $25.6 million PAGE <21> compared to 1990. These increases are due primarily to the acquisition of PMSI, effective November 1, 1990, and to an increase in the volume of state fees for motor vehicle reports, related to new business, which is part of the Company's property and casualty information services business. Other operating costs and expenses for 1992 increased $29.4 million compared to 1991 and increased $12.4 million for 1991 compared to 1990. These increases result primarily from increased costs associated with providing total policy management outsourcing services, principally the New Jersey MTF, costs associated with European and Australian facilities management and outsourcing contracts and to a lesser extent, the acquisition of PMSI. Interest expense decreased $2.7 million for 1992 compared to 1991 and decreased $2.8 million for 1991 compared to 1990. These decreases resulted from the redemption of the Company's $100 million, 5.5% Convertible Subordinated Debentures in May 1991. Interest expense relating to this debt was $2.2 and $5.6 million in 1991 and 1990, respectively. The effective income tax rate (income taxes expressed as a percentage of pre-tax income) was 32.2%, 34.6% and 32.9% for the years ended December 31, 1992, 1991 and 1990, respectively. The decrease in the effective rate between 1992 and 1991 was due primarily to an increase in nontaxable investment income. The increase in the effective rate between 1991 and 1990 was due primarily to an increase in amortization of goodwill relating to business acquisitions, which is not deductible for income tax purposes, and a decrease in research and experimentation tax credits. Liquidity and Capital Resources December 31, 1992 1991 (In Millions) Cash and equivalents and marketable securities.................................. $238.5 $197.4 Current assets................................ 343.9 299.8 Current liabilities........................... 57.2 67.5 Working capital............................... 286.7 232.3 Cash provided by operations................... 107.8 83.6 Cash used for investing activities............ (127.4) (85.6) Cash provided by financing activities......... 12.2 13.7 The Company's financial condition remained strong at December 31, 1992. Working capital was $286.7 million, including cash, cash equivalents and marketable securities of $238.5 million as compared to $197.4 million at December 31, 1991, a net increase of $41.1 PAGE <22> million. Significant expenditures during 1992 included: acquisition of data processing and communications equipment, support software and office furniture and equipment used in the Company's operations ($43.5 million); acquisition of businesses and software products, including debt and contingency payments relating to past business acquisitions ($10.3 million); and payments for construction of additional office facilities at the Company's corporate headquarters ($9.4 million). Significant nonrecurring expenditures anticipated for 1993 are as follows: acquisition of data processing and communications equipment, support software and office furniture and fixtures ($35.8 million); acquisition of software products and debt and contingency payments relating to past business acquisitions ($13.6 million); and completion of construction of additional office and dining facilities at the Company's corporate headquarters to accommodate the Company's continued rapid growth ($2.1 million). The Company believes that current cash and investment reserves and cash to be provided by operations will be sufficient to satisfy its existing and presently anticipated operating and capital resource needs. The Company has historically used the cash generated from operations for the following: development and acquisition of new products, acquisition of businesses and repurchase of the Company's stock. The Company anticipates that it will continue to use its cash for all of these purposes in the future and that projected cash from operations will be able to meet presently anticipated needs; however, the Company may also consider incurring debt as needed to accomplish specific objectives in these areas and for other general corporate purposes. PAGE <23> Seasonality and Inflation The Company's operations have not proven to be significantly seasonal, although quarterly revenues and net income could be expected to vary at times. This is attributable principally to the timing of customers entering into license agreements with the Company and fluctuations in the amount of certain information services used by customers, principally during holiday seasons and periods of severe weather. The Company is unable to control the timing of these decisions or fluctuations. Although the Company cannot accurately determine the amounts attributable thereto, the Company has been affected by inflation through increased costs of employee compensation and other operating expenses. To the extent permitted by the marketplace for the Company's products and services, the Company attempts to recover increases in costs by periodically increasing prices. Additionally, most of the Company's license agreements and long- term services agreements provide for annual increases in charges. PAGE <24> ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements and Supplementary Data Page Report of Independent Accountants........................ 25 Consolidated Financial Statements and Notes: Consolidated Statement of Operations for the years ended December 31, 1992, 1991 and 1990.............. 26 Consolidated Balance Sheets as of December 31, 1992 and 1991.......................... 27 Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 1992, 1991 and 1990.................... 28 Consolidated Statement of Cash Flows for the years ended December 31, 1992, 1991 and 1990........ 29 Notes to Consolidated Financial Statements............. 30 Quarterly Consolidated Results of Operations............................................. 44 Supplemental Schedules: Schedule I - Marketable Securities..................... 46 Schedule V - Property and Equipment.................... 47 Schedule VI - Accumulated Depreciation and Amortization of Property and Equipment.............. 49 Schedule X - Supplementary Income Statement Information............................... 51 Supplemental schedules other than those listed above are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or in the notes thereto. PAGE <25> REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Policy Management Systems Corporation We have audited the accompanying consolidated balance sheet of Policy Management Systems Corporation and subsidiaries as of December 31, 1992 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion. As further discussed in Note 2 to the consolidated financial statements, management discovered certain errors in the Company's previously issued financial statements. Accordingly, the balance sheet and the statements of operations, changes in stockholders' equity and cash flows for the year ended December 31, 1992 have been restated to reflect the correction of these errors. In 1993, lawsuits were filed against the Company and certain of its present and former officers and directors alleging violation of securities laws as well as negligent misrepresentation. In addition, the Securities and Exchange Commission is conducting an investigation into possible violations of Federal securities laws. These issues are further discussed in Note 5 to the consolidated financial statements. Management cannot predict the ultimate impact of these actions on the consolidated financial statements. Accordingly, no provisions have been made in the consolidated financial statements. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Policy Management Systems Corporation and subsidiaries as of December 31, 1992, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Atlanta, Georgia Coopers & Lybrand L.L.P. September 6, 1994 PAGE <26> POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1992 1991 1990 (Restated) (Restated) (Restated) (Unaudited) (In Thousands, Except Per Share Data) Revenues Licensing............................................$ 73,007 $ 75,988 $ 70,376 Services............................................. 416,254 335,168 271,316 489,261 411,156 341,692 Costs and Expenses Employee compensation and benefits.................. 168,144 157,249 141,699 Computer and communications expenses................ 39,656 30,717 27,189 Information services and data acquistion costs...... 92,827 79,282 53,731 Other operating costs and expenses.................. 109,663 80,249 67,866 410,290 347,497 290,485 Operating income.................................... 78,971 63,659 51,207 Other Income and Expenses: Investment income................................. 12,073 11,715 11,047 Gain on sale of marketable securities............. 1,046 1,456 19 Interest expense and other charges................ (1,327) (4,054) (6,844) 11,792 9,117 4,222 Income before income taxes.......................... 90,763 72,776 55,429 Income taxes........................................ 29,241 25,180 18,263 Net income.......................................... $ 61,522 $ 47,596 $ 37,166 Net income per share................................ $ 2.65 $ 2.21 $ 1.92 Fully diluted net income per share.................. - $ 2.14 $ 1.80 See accompanying notes.
PAGE <27> POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED BALANCE SHEETS
December 31, 1992 1991 (As Restated) (As Restated) (Unaudited) (In Thousands, Except Share Data) Assets Current assets: Cash and equivalents........................................$ 31,959 $ 39,609 Marketable securities....................................... 206,562 157,805 Receivables, net of provisions for uncollectible amounts of $1,630 ($1,198 at 1991)............................... 86,479 87,398 Income taxes receivable..................................... 2,891 1,117 Deferred income taxes....................................... 8,083 6,981 Other....................................................... 7,939 6,840 Total current assets..................................... 343,913 299,750 Property and equipment........................................ 131,696 117,908 Receivables................................................... 22,252 11,568 Note receivable............................................... - 9,500 Intangibles................................................... 100,792 105,874 Capitalized software costs.................................... 99,414 77,669 Deferred income taxes......................................... 2,580 - Other......................................................... 6,295 10,423 Total assets..........................................$706,942 $632,692 Liabilities Current liabilities: Accounts payable and accrued expenses.......................$ 37,022 $ 51,523 Accrued contract termination costs.......................... 4,008 1,095 Current portion of long-term debt........................... 3,670 3,689 Unearned revenues........................................... 11,500 9,204 Other....................................................... 1,026 1,994 Total current liabilities................................ 57,226 67,505 Long-term debt................................................ 6,001 5,976 Deferred income taxes......................................... 56,112 50,897 Other......................................................... 8,527 8,435 Total liabilities........................................ 127,866 132,813 Commitments and contingencies (Note 4) Stockholders' Equity Special stock, $.01 par value, 5,000,000 shares authorized.... - - Common stock, $.01 par value, 75,000,000 shares authorized, 23,524,197 shares issued and outstanding (23,054,713 at 1991).................................................... 235 231 Additional paid-in capital.................................... 307,906 289,314 Retained earnings............................................. 272,766 211,244 Foreign currency translation adjustment....................... (1,831) - Unrealized loss on marketable equity securities............... - (910) Total stockholders' equity............................... 579,076 499,879 Total liabilities and stockholders' equity............$706,942 $632,692 See accompanying notes.
PAGE <28> POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Unrealized Addi- Foreign Loss on tional Currency Marketable Common Paid-In Retained Translation Equity Stock Capital Earnings Adjustment Securities Total (In Thousands) Balance, December 31, 1989, as previously reported....... $193 $161,275 $123,601 $ - $ - $285,069 Effect of restatement attributable to prior years.. - - 2,880 - - 2,880 Balance, December 31, 1989, as restated (unaudited)...... 193 161,275 126,481 - - 287,949 Net income..................... - - 37,167 - 37,167 Stock options exercised........ 1 3,651 - - - 3,652 New York Stock Exchange listing expenses............. - (200) - - - (200) Unrealized loss on noncurrent marketable equity securities............ - - - - (1,160) (1,160) ____ ________ ________ ________ ________ _______ Balance, December 31, 1990, as restated (unaudited)...... 194 164,726 163,648 - (1,160) 327,408 Net income..................... - - 47,596 - - 47,596 Stock issued under incentive compensation plan............ - 1,522 - - - 1,522 Stock options exercised........ 9 25,270 - - - 25,279 Conversion of convertible debentures................... 28 97,796 - - - 97,824 Decrease in unrealized loss on noncurrent marketable equity securities................... - - - - 250 250 ____ ________ ________ ________ ________ _______ Balance, December 31, 1991, as restated (unaudited)...... 231 289,314 211,244 - (910) 499,879 Net income..................... - - 61,522 - - 61,522 Stock options exercised........ 4 18,592 - - - 18,596 Transfer of marketable equity securities to current portfolio............ - - - - 910 910 Foreign currency translation adjustment................... - - - (1,831) - (1,831) Balance,December 31, 1992, as restated.................. $235 $307,906 $272,766 $ (1,831) $ - $579,076 See accompanying notes.
PAGE <29> POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1992 1991 1990 (Restated) (Restated) (Restated) (Unaudited) (Unaudited) (In Thousands) Operating Activities Net income/(loss)..................................... $ 61,522 $47,596 $ 37,167 Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Depreciation and amortization...................... 51,104 41,538 40,636 Deferred income taxes.............................. 2,178 6,154 10,138 Gain on sale of marketable securities.............. - (1,456) (33) Provision for uncollectable accounts............... 712 - - Changes in assets and liabilites Receivables........................................ (11,878) (16,632) 6,342 Income taxes receivable............................ (1,774) 3,961 1,056 Accounts payable and accrued expenses.............. (1,108) 6,033 (2,297) Income taxes payable............................... 160 (17) - Other, net........................................... 9,765 (3,550) (7,406) Cash provided by operations..................... 107,831 83,627 85,603 Investing Activities Increase in marketable securities..................... (48,382) (32,722) (12,852) Acquisition of property and equipment................. (56,011) (20,664) (37,222) Capitalized internal software development costs....... (24,344) (28,713) (27,795) Purchased software.................................... (5,702) (623) (1,461) Proceeds from disposal of property and equipment...... 4,307 1,705 162 Business acquisitions................................. (2,194) (9,215) (7,111) Cash used for investing activities............... (127,427) (85,598) (86,279) Financing Activities Payments on capital lease obligations................. (467) (1,887) (1,532) Payments on long-term debt............................ (2,066) (3,169) (2,926) Issuance of common stock under stock option plans......................................... 14,692 18,725 3,652 New York Stock Exchange listing expenses.............. - - (200) Cash provided (used) by financing activities..... 12,159 13,669 (1,006) Effect of exchange rate changes on cash................. (213) - - Net increase (decrease) in cash and equivalents......... (7,650) 11,698 (1,682) Cash and equivalents at beginning of year............... 39,609 27,911 29,593 Cash and equivalents at end of year..................... $ 31,959 $ 39,609 $ 27,911 Noncash Activities Long-term debt arising from and assumed in connection with business acquisitions................ $ 2,187 $ 9,918 $ 3,488 Reduction in long-term debt resulting from conversion of convertible debentures into common stock......................................... - (99,983) - Supplemental Information Interest paid......................................... 958 5,431 6,109 Income taxes paid..................................... 25,126 11,033 9,643 See accompanying notes.
PAGE <30> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements are prepared on the basis of generally accepted accounting principles and include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All material intercompany balances and transactions have been eliminated. Certain amounts previously presented in the consolidated financial statements for prior periods have been reclassified to conform to current classifications. The consolidated balance sheet as of December 31, 1992 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended have been audited and are restated herein. The consolidated balance sheet as of December 31, 1991 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended December 31, 1991 and 1990 have been restated by the Company, without audit, to conform to the adjustments to the Company's retained earnings as of December 31, 1991, as discussed in Note 2. These adjustments include all adjustments which are, in the opinion of management, necessary to state fairly the results for the periods presented. Segment Information The Company operates in one business segment, the providing of computer software systems and related automation and administration support and information services to the insurance industry. No customer accounted for more than 10% of revenues in 1992, 1991 or 1990. Revenue Recognition The Company's revenues are generated primarily by licensing to customers standardized insurance software systems and providing automation and administrative support and information services to the insurance industry. Software systems are licensed under the terms of substantially standard nonexclusive and nontransferable license agreements, which generally have a noncancelable minimum term of six years and provide for an initial license charge and a monthly license charge. The initial license charge, which grants a right to use the software system currently available at the time the license is signed, is recognized as revenue upon delivery of the product and receipt of a signed contractual obligation. The monthly license charge provides access to Maintenance, Enhancements and Services Availability ("MESA"). Under the maintenance provisions of MESA, the Company provides telephone support and error correction to PAGE <31> current versions of licensed systems. Under the enhancement provisions of MESA, the Company will provide any additions or modifications to the licensed systems, which the Company may deliver from time to time to licensees of those systems if and when they become generally available. The monthly license charge is recognized as revenue on a monthly basis throughout the term of the MESA provision of the license agreement. Services availability allows customers access to professional services, other than maintenance and enhancements, which are provided under separate arrangements during the MESA term. The Company provides professional support services, including systems implementation and integration assistance and consulting and educational services, which are available under services agreements and charged for separately. These services are generally provided under time and material contracts and in some circumstances under fixed price arrangements. Under fixed price contracts, revenue is recognized on the basis of the estimated percentage of completion of service provided using the cost to cost method. Changes in estimates to complete and losses, if any, are recognized in the period in which they are determined. The Company also offers information and outsourcing services ranging from making available software licensed from the Company on a remote processing basis from the Company's data centers, to complete systems management, processing, administrative support and automated information services through the Company's nationwide telecommunications network using the Company's database products. Outsourcing services are typically provided under contracts having terms from three to ten years. Revenues from substantially all outsourcing and information services are recognized at the time the service is performed. The Company adopted the provisions of the Statement of Position for "Software Revenue Recognition" of the American Institute of Certified Public Accountants effective January 1, 1992. Application of these provisions resulted in revenues and earnings which approximated those of the Company under previous revenue recognition practices. Marketable Securities Interest bearing marketable securities are stated at amortized cost, which approximates market value. Current marketable equity securities are stated at the aggregate of lower of cost or market and a valuation allowance is provided for the excess, if any, of cost over market. The fair values of marketable securities are estimated based on quoted market prices for those or similar investments. Gains or losses on marketable securities are determined on the specific identification method. Marketable securities consist of the following: PAGE <32> December 31, 1992 1991 (Unaudited) (In Thousands) U.S. Government and Agency securities.... $ 9,072 $10,021 Corporate notes.......................... - 1,000 Municipal bonds and notes................ 197,115 46,784 Equity securities........................ 375 - Total................................ $206,562 $157,805 Investment securities with original maturities of three months or less at the time of acquisition are considered cash equivalents. Marketable equity securities held for long-term investment are included in other noncurrent assets at market value and a reserve for unrealized gains or losses thereon is included in stockholders' equity. Property and Equipment Property and equipment, including certain equipment acquired under capital leases, are stated at cost less accumulated depreciation and amortization. Property and equipment are depreciated on a straight-line basis over their estimated useful lives. Assets acquired under capital leases are amortized over the term of the related lease. Computer Software In accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed" (FAS 86), certain costs incurred in the internal development of computer software which is to be licensed to customers and costs of purchased computer software, consisting primarily of software acquired through business acquisitions, are capitalized and amortized at the greater of the amount computed using (i) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues of that product or (ii) the straight-line method over the remaining estimated economic life of the product including the period being reported on. Costs which are capitalized as part of internally developed software primarily include direct and indirect costs associated with payroll, computer time and allocable depreciation and other direct allocable costs, among others. All costs incurred prior to the establishment of technological feasibility have been expensed as research and development costs during the periods in which they were incurred and amounted to $13.3, $10.9 and $2.3 million for the years ended December 31, 1992, 1991, and 1990, respectively. PAGE <33> As part of the Company's restatement of its prior years' retained earnings (see Note 2), additional software costs in the cumulative amount of $30.5 million ($18.9 million net of tax) were capitalized as of December 31, 1992 ($28.3 million as of December 31, 1991). A detailed study of all software-related expenditures dating back to December 15, 1988 indicated significant misallocation and overexpensing of development costs. This error relating to under-capitalization of software development costs was due to certain weaknesses in the Company's then existing cost accounting and accumulation system which did not capture all appropriately capitalizable costs as defined in FAS 86. The additional capitalized costs include both elements of direct and indirect costs as described above as required by FAS 86. All of the additional capitalized software costs are related to the Company's property and casualty business software systems. Additional development costs relating to the Company's internally developed Series III life systems were not capitalized because all the conditions of FAS 86 were not met. No significant software development costs were capitalized for the Company's health insurance business. For all years through December 31, 1992, the Company amortized internally developed software on a straight-line basis over an estimated useful life of four years. Amortization charged to expense was $20.3, $18.4 and $18.7 million for the years ended December 31, 1992, 1991 and 1990, respectively. Capitalized software costs are as follows: December 31, 1992 1991 (Unaudited) (In Thousands) Internally developed software............. $ 99,628 $ 91,950 Purchased software........................ 41,014 23,304 140,642 115,254 Less: Accumulated amortization........... (41,228) (37,585) Capitalized software costs................ $ 99,414 $ 77,669 Income Taxes In 1992, the Company adopted the provisions of Statement No. 109, "Accounting for Income Taxes", ("Statement 109") of the Financial Accounting Standards Board. Under Statement 109, the deferred tax liabilities and assets are determined based on temporary differences between the bases of certain assets and liabilities for income tax and financial reporting purposes. These differences are primarily attributable to differences in the recognition of depreciation and amortization of property, equipment and intangible assets and certain software development costs and revenues. Although this change had no impact on the calculation of PAGE <34> the Company's total income tax provision or net deferred income taxes, the classification of certain deferred income tax liabilities and assets as either current or noncurrent changed and consolidated balance sheets for prior periods have been restated to reflect these changes. Research and experimentation tax credits are recognized as reductions in the income tax provision in the year in which they became available. Net Income Per Share Net income per share is based upon the weighted average number of common shares outstanding. Outstanding stock options are common stock equivalents, but are excluded from the computation of net income per share since their dilutive effect is not material. Fully diluted net income per share is based upon the weighted average number of common shares plus common stock equivalents outstanding and gives effect to the assumed conversion of all outstanding convertible debt until actually converted or redeemed in May 1991 (see Note 5). Had conversion or redemption occurred on January 1, 1991, net income per share would have approximated fully diluted net income per share for 1991. The weighted average number of shares used in computing income per share amounts is as follows: Year Ended December 31, 1992 1991 1990 (Unaudited) (Unaudited) Net income per share................. 23,236,455 21,567,575 19,364,453 Fully diluted net income per share... - 22,895,007 22,631,642 Foreign Currency Translation The local currencies of the Company's foreign subsidiaries have been determined to be the functional currencies. Assets and liabilities of foreign subsidiaries are translated into United States dollars at current exchange rates, resulting translation gains and losses are included as an adjustment to stockholders' equity. Revenue and expense accounts of these operations are translated at average exchange rates prevailing during the year. Transaction gains and losses, which were not material, are included in the results of operations of the period in which they occur. NOTE 2. RESTATEMENT OF PRIOR YEARS' RESULTS OF OPERATIONS In August 1993, the Company engaged independent accountants to conduct a special audit of the Company's consolidated financial statements as of and for the six months ended June 30, 1993. As a result of this audit, the Company determined that retained earnings previously reported as of December 31, 1992 required adjustment. These adjustments were due to errors in the application of PAGE <35> accounting principles and subsequent discovery of facts existing at February 26, 1993, the date of the predecessor auditor's report. The components, net of related tax effects, of the cumulative adjustment to retained earnings as of December 31, 1992, are as follows: Increase (Decrease) to Retained Earnings (In Thousands) Elimination of revenue related to a contingent contract that that was cancelled............... $ (820) Deferral of revenues due to changes in timing of revenue recognition...................... (8,408) Reduction of expenses due to capitalization of certain software costs (see Note 1)...... 18,863 Recognition of expenses due to changes in timing of expense accrual.................. (1,622) Reserve for losses on certain services contracts............... (5,536) Reduction of current income tax liability due to previously unrecorded tax credits........... 2,580 Cumulative retained earnings as of December 31, 1992.......... $ 5,057 In February 1994, the Company engaged independent accountants to audit the Company's consolidated financial statements as of and for the twelve months ended December 31, 1993 and 1992. As a result of the 1992 audit, the Company determined the specific prior period or periods in 1992 affected by the above adjustments and also determined that retained earnings previously reported as of December 31, 1991 required adjustment. The components (net of related tax effects) of the adjustment to previously reported net income for the years ended December 31, 1992, 1991 and 1990 are as follows: PAGE <36> Increase (Decrease) to Net Income 1992 1991 1990 (Unaudited) (Unaudited) (In Thousands) Elimination of revenue related to a contingent contract that that was cancelled.............$ (820) $ - $ - Deferral of revenues due to changes in timing of revenue recognition.................... (2,331) (1,088) (2,653) Reduction of expenses due to capitalization of certain software costs (see Note 1).... 1,557 4,668 3,594 Recognition of expenses due to changes in timing of expense accrual................ 3,365 (364) (833) Reserve for losses on certain services contracts............. (2,179) (3,196) (123) Reduction of current income tax liability due to previously unrecorded tax credits......... 2,580 - - Net income adjustment............ $ 2,172 $ 20 $ (15) Adjustment per share............. $ .10 $ - $ - The net income adjustment for the years ended December 31, 1991 and 1990 had no effect on net income per share as previously reported. The components, net of related tax effects, of the cumulative adjustment to retained earnings as of December 31, 1989, are as follows: (Unaudited) Increase (Decrease) to Retained Earnings (In Thousands) Deferral of revenues due to changes in timing of revenue recognition...................... $(2,336) Reduction of expenses due to capitalization of certain software costs (see Note 1)...... 9,044 Recognition of expenses due to changes in timing of expense accrual.................. (3,791) Reserve for losses on certain services contracts............... (37) Cumulative retained earnings as of December 31, 1989.......... $ 2,880 PAGE <37> Deferral of revenues due to changes in timing of revenue recognition includes situations where (i) there were errors in accounting for contracts under the percentage of completion method; (ii) there were delays in receiving signed contracts; (iii) customers prepaid or were billed for services performed in subsequent periods or where refunds or provisions for credit were contractually required and (iv) the Company had future delivery obligations under certain contracts. NOTE 3. ACQUISITIONS Since January 1986, the Company has acquired twenty-nine businesses. These business acquisitions have assisted the Company in establishing itself as a leading provider of a full range of automation, administration support and information solutions to the entire insurance industry. The aggregate consideration for these acquisitions was $3,600,000 in 1992 ($5,900,000 in 1991 and $9,100,000 in 1990) in cash and interest bearing promissory notes, plus contingent future cash payments for certain acquisitions. Effective March 31, 1992, the Company acquired the CAPSIL business and operations of Capsco-Pallm Systems, Inc. ("CAPSCO") of Indianapolis, Indiana, for an aggregate consideration of $3,600,000 in cash and an interest bearing promissory note. CAPSCO provides software applications designed for use by life and health insurance companies. These business acquisitions have been accounted for under the purchase method. Accordingly, the results of operations for each of these acquired businesses are included in the consolidated statements of income since the effective dates of the respective acquisitions. In addition to business acquisitions, the Company has on occasion acquired data processing facilities and equipment and related assets and paid a contract acquisition premium in consideration of customers entering into major, long-term outsourcing arrangements with the Company. Intangibles include the excess of the acquisition cost over the fair value of net assets acquired for acquisitions of $83,093,000 at December 31, 1992 ($80,322,000 at 1991), which is being amortized on a straight-line basis over 25 years. The remainder of intangibles consists of assets, primarily customer lists and contracts in force, relating to acquisitions of $48,247,000 at December 31, 1992 ($46,531,000 at 1991), which is being amortized on a straight-line basis over 2-25 years. Accumulated amortization related to intangibles was $29,651,000 at December 31, 1992 ($20,979,000 at 1991). PAGE <38> NOTE 4. PROPERTY AND EQUIPMENT A summary of property and equipment is as follows: Estimated December 31, Useful Life 1992 1991 (Unaudited) (Years) (In Thousands) Cost: Land and improvements....................... - $ 2,557 $ 2,557 Buildings................................... 10-40 41,820 41,680 Construction in progress.................... - 15,721 6,277 Leasehold improvements...................... 1-10 3,351 2,718 Office furniture, fixtures and equipment.... 5-15 30,370 27,612 Data processing and communications equipment................................ 2-5 116,135 108,321 Other....................................... 3-5 5,472 5,095 ________ ________ 215,426 194,260 Less: Accumulated depreciation and amortization..................... (83,730) (76,352) ________ ________ Property and equipment....................... $131,696 $117,908 Land includes 145 acres on which the Company's Columbia, South Carolina, corporate headquarters are located. In mid-1991, the Company began construction of a 176,000 square foot addition to its corporate headquarters which was completed in early 1993 at a total cost of $16,200,000. Depreciation and amortization charged to expense was $24,109,000 in 1992 ($17,846,000 in 1991 and $15,534,000 in 1990). NOTE 5. COMMITMENTS AND CONTINGENCIES Commitments The Company occupies leased facilities under various operating leases expiring through 2014. The leases for certain facilities contain options for renewal and provide for escalation of annual rentals based upon increases in the lessors' operating costs. Rent expense under leases for facilities was $8,675,000 in 1992 ($7,533,000 in 1991 and $7,402,000 in 1990). The Company leases certain data processing and related equipment under both capital and operating leases expiring through 1995. Rent expense under operating leases for such equipment was $4,265,000 in 1992 ($965,000 in 1991 and $2,211,000 in 1990). Future minimum lease obligations under noncancelable operating leases are as follows: PAGE <39> Data Processing Facilities Equipment Total (In Thousands) Year Ending December 31, 1993............................ $ 7,587 $ 61 $ 7,648 1994............................ 6,533 48 6,581 1995............................ 5,536 21 5,557 1996............................ 4,914 - 4,914 1997............................ 4,348 - 4,348 Thereafter...................... 20,879 - 20,879 _______ ____ _______ Total............................. $49,797 $130 $49,927 Assets acquired under capital leases are capitalized using interest rates appropriate at the inception of the lease. At December 31, 1992, the net book value of property and equipment acquired under capital leases and related future minimum obligations were not material. Contingencies In April 1993, litigation was commenced against the Company and certain of its present and former officers and directors in the United States District Court for the District of South Carolina, Columbia Division. In the litigation, which is a class action on behalf of purchasers of the Company's common stock between March 18, 1992 and July 8, 1993, the plaintiffs allege that the Company failed to prepare its financial statements in accordance with generally accepted accounting principles and omitted to disclose certain information regarding, among other things, its business and prospects in violation of the Federal securities laws, the South Carolina Code and common law. The Company believes it has meritorious defenses to the claims and is vigorously defending the litigation. The plaintiffs seek unspecified compensatory damages, legal fees and litigation costs. The Company is unable to predict the outcome or the potential financial impact of this litigation. The maximum insurance coverage related to these claims is $15 million under the directors' and officers' insurance. In June 1993, the Securities and Exchange Commission (SEC) commenced a formal investigation into possible violations of the Federal securities laws in connection with the Company's public reports and financial statements, as well as trading in the Company's securities. The SEC has issued a formal order of investigation which provides the SEC staff with the power to subpoena documents and to compel testimony in connection with their investigation. The Company is cooperating with the SEC in connection with this investigation. PAGE <40> NOTE 6. LONG-TERM DEBT Long-term debt is as follows: December 31, 1992 1991 (Unaudited) (In Thousands) Notes payable, due through October 1995, interest at 4.51% to 10.00%............... $ 9,671 $ 9,665 Less:Current portion........................ (3,670) (3,689) _______ _______ Long-term debt............................... $ 6,001 $ 5,976 In May 1991, the Company called for the redemption of all its $100 million, 5.5% Convertible Subordinated Debentures, originally due February 1, 2012. The debentures were converted into 2,758,050 shares of common stock at a conversion price of $36.25 per share and $17,000 was redeemed in cash. NOTE 7. INCOME TAXES A reconciliation of the difference between the actual income tax provision and the expected provision, computed using the applicable statutory rate, is as follows: Year Ended December 31, 1992 1991 1990 (Restated) (Restated) (Restated) (Unaudited) (Unaudited) Statutory rate.............................. 34% 34% 34% (In Thousands) Income tax provision computed at statutory rate............................ $30,859 $24,744 $18,847 Increase (decrease) in taxes due to: Research and experimentation credits...... - (159) (1,680) Nontaxable investment income.............. (3,336) (2,823) (2,541) State and local income taxes, net of federal tax benefit..................... 489 2,140 1,658 Other..................................... 1,229 1,278 1,979 _______ _______ _______ Actual income tax provision................. $29,241 $25,180 $18,263 Effective income tax rate................... 32.2% 34.6% 32.9% PAGE <41> An analysis of the income tax provision is as follows: Year Ended December 31, 1992 1991 1990 (Restated) (Restated) (Restated) (Unaudited) (Unaudited) (In Thousands) Current taxes................................ $27,063 $19,023 $ 8,123 Deferred income taxes relating to temporary differences: Depreciation and amortization of property, equipment and intangibles...... (1,907) (345) 2,055 Capitalized internal software development costs.................................. 4,458 5,107 4,590 Other.................................... (373) 1,395 3,495 2,178 6,157 10,140 Total income tax provision................... $29,241 $25,180 $18,263 An analysis of deferred income taxes is as follows: December 31, 1992 1991 (Unaudited) (In Thousands) Depreciation and amortization of property, equipment and intangibles......................... $23,726 $22,122 Capitalized internal software development costs...... 28,073 27,153 Software development revenues........................ Other................................................ (6,350) (5,359) _______ _______ Deferred income taxes................................ $45,449 $43,916 In 1992, the Internal Revenue Service completed its normal examination of the Company's consolidated federal income tax returns for the years 1985 through 1988 and has proposed certain adjustments for those years. The Company believes that its judgement in the areas for which adjustments have been proposed has been appropriate and is contesting the proposed adjustments. Additionally, the Company believes that adequate amounts of federal income tax have been provided in its consolidated financial statements for these years. NOTE 8. EMPLOYEE BENEFIT PLANS Profit Sharing Retirement Plan Eligible employees of the Company are covered under the Company's profit sharing retirement plan. The Company's contribution to the plan is determined by the Board of Directors of the Company. Employees make no contributions to this plan. The PAGE <42> Company made contributions of $800,000 in early 1993, $720,000 in early 1992, and $600,000 in early 1991 for the plan years 1992, 1991, and 1990, respectively. Retirement Savings Plan The Company offers a 401(k) retirement savings plan for eligible employees. Participants can elect to have up to 6% of their salary withheld for investment in the program and the Company will make a matching contribution of $.50 for each $1.00 of employee participation. Participants may also make limited additional contributions which are not subject to matching contributions by the Company. Participants have several options as to how their contributions may be invested, but all matching Company contributions are invested in common stock of the Company. Except in certain instances, participant contributions are made from pre-tax wages. The Company's contribution on behalf of participating employees was $1,900,000 for 1992 ($1,739,000 for 1991 and $1,389,000 for 1990). Stock Option Plans The Company has various plans under which options to purchase shares of the Company's common stock have been or may be granted to eligible employees and members of the Board of Directors ofthe Company. All options granted in 1992 are subject to approval by the Company's stockholders of an amendment to increase the number of shares available for grant under the 1989 stock option plan by 1,300,000 shares. If approval is obtained, options for a total of 996,939 shares of the Company's common stock will be available for future grant under these plans. Option activity is summarized as follows: Year Ended December 31, 1992 1991 1990 (Unaudited) (Unaudited) Shares under option at beginning of year.............................. 1,295,297 1,789,938 1,549,104 Granted.............................. 396,300 390,200 404,100 Exercised............................ (469,483) (823,665) (132,415) Forfeited............................ (19,258) (61,176) (30,851) Shares under option at end of year... 1,202,856 1,295,297 1,789,938 Shares under option exercisable at end of year.................... 443,297 569,759 1,020,338 The option prices of options exercised during 1992, 1991 and 1990 were $15.13 to $49.63. The option prices of shares under option at December 31, 1992, 1991 and 1990 were $15.13 to $69.38. PAGE <43> All options have been granted at 100% of market value at date of grant and are exercisable at the rate of 33 1/3% per year (cumulative) beginning one year from date of grant. NOTE 9. CERTAIN TRANSACTIONS In August 1989, International Business Machines Corporation ("IBM") acquired directly from the Company a 19.8% interest in the Company's outstanding voting stock for $116,775,000. IBM is entitled to increase its ownership interest up to a maximum of 30% by purchasing the Company's common stock in the open market. IBM's ownership interest was 16.1% at December 31, 1992. IBM and the Company work closely together to develop and market automation solutions for the insurance industry. Certain officers of the Company, currently numbering eighteen, participated in the Company's long-term incentive plan for executives, which began January 1, 1987 and ended December 31, 1992. The plan provided for the payment of pre established bonuses, payable either in cash, common stock of the Company or a combination thereof, if certain earnings per share performance goals were reached by the Company during the six-year life of the plan. In 1991 and 1989, 36,678 and 73,073 shares of common stock, respectively, were issued in conjunction with bonuses paid under this plan, leaving a total of 265,249 shares available for distribution under this plan at December 31, 1992. Bonuses earned under the final two year period of the plan ended December 31, 1992, which will be paid in 1993, could result in the issuance of a maximum of 45,348 shares of common stock. For several years the Company had been party to several agreements with Agency Automation Partners Limited ("Partnership"), a privately placed research and development limited partnership formed for the purpose of developing and marketing an automated insurance agency sales and marketing system, Agency Workstation ("AWS"). In December 1992, the Company terminated its relationship with the Partnership and acquired all ownership rights to AWS for a cash payment of $1,500,000 and other consideration, including the release of the Partnership from its obligations under a loan payable to the Company in the principal amount of $9,500,000. Pursuant to a stock repurchase program approved by the Board of Directors in late 1990, the Company may purchase from time to time on the open market up to 5% (970,668 shares) of its issued and outstanding common stock. No shares have been repurchased under this program. PAGE <44> QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (Unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter (In Thousands, Except Per Share Data) 1992 (Restated) Revenues.................................... $117,448 $121,239 $124,086 $126,488 Operating income............................ 17,713 20,222 20,849 20,187 Investment income, net of interest expense.. 2,793 2,840 3,212 2,947 Income before income taxes.................. 20,506 23,062 24,061 23,134 Net income.................................. $ 13,840 $ 15,485 $ 16,143 $ 16,054 Net income per share........................ $ .60 $ .67 $ .69 $ .69 1992 (As Previously Reported) Revenues.................................... $116,078 $123,119 $126,371 $131,544 Operating income............................ 18,324 19,326 20,147 21,744 Investment income, net of interest expense.. 2,784 2,809 3,215 3,075 Income before income taxes.................. 21,108 22,135 23,362 24,819 Net income.................................. $ 13,715 $ 14,395 $ 15,168 $ 16,072 Net income per share........................ $ .59 $ .62 $ .65 $ .69 1991 (Restated) Revenues.................................... $ 98,566 $ 97,696 $102,427 $112,467 Operating income............................ 16,283 13,326 16,036 18,014 Investment income, net of interest expense.. 1,232 1,971 2,879 3,035 Income before income taxes.................. 17,515 15,297 18,915 21,049 Net income.................................. $ 11,448 $ 10,083 $ 12,343 $ 13,722 Net income per share........................ $ .59 $ .48 $ .54 $ .60 Fully diluted net income per share.......... $ .54 $ .46 $ .55 $ .58 1991 (As Previously Reported) Revenues.................................... $ 96,375 $101,619 $105,425 $111,947 Operating income............................ 14,683 15,588 16,242 17,317 Investment income, net of interest expense.. 1,235 1,891 2,845 2,938 Income before income taxes.................. 15,918 17,479 19,087 20,255 Net income.................................. $ 10,460 $ 11,434 $ 12,450 $ 13,232 Net income per share........................ $ .54 $ .54 $ .55 $ .58 Fully diluted net income per share.......... $ .49 $ .52 $ .55 $ .58 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
PAGE <45> reported as of December 31, 1992 required adjustment. These adjustments were due to errors in the application of accounting principles and subsequent discovery of facts existing at February 26, 1993, the date of the predecessor auditor's report. In February 1994, the Company engaged independent accountants to audit the Company's consolidated financial statements as of and for the twelve months ended December 31, 1993 and 1992. The Company has determined the specific prior periods affected by these adjustments and has restated its financial statements for such periods (see Note 2 of Notes to Consolidated Financial Statements). PAGE <46> SCHEDULE I POLICY MANAGEMENT SYSTEMS CORPORATION MARKETABLE SECURITIES December 31, 1992 Maturity Amortized Market Book Description Value Cost Value Value (In Thousands) 5.29% - 9.50% U.S. Government and Agency securities, maturing on various dates through October 1994............................. $ 9,000 $ 9,072 $ 9,116 $ 9,072 2.94% - 11.0% Municipal bonds and notes, maturing on various dates through January 1998 (all rated A or better).......... 188,385 197,115 198,843 197,115 200,000 shares, The Seibels Bruce Group, Inc. common stock, par value $1 per share........... - - 375 375 $197,385 $206,187 $208,334 $206,562 PAGE <47> SCHEDULE V POLICY MANAGEMENT SYSTEMS CORPORATION PROPERTY AND EQUIPMENT (RESTATED) (UNAUDITED) Balance Addi- At tions Other Balance Beginning At Retire- Changes At End Of Year Cost ments (1) Of Year (In Thousands) Year ended December 31, 1990: Land and improvements...... $ 2,557 $ - $ - $ - $ 2,557 Buildings ................. 31,052 422 (231) 9,721 40,964 Construction in progress... 858 8,970 - (9,718) 110 Leasehold improvements..... 1,846 404 - 421 2,671 Office furniture, fixtures and equipment... 19,241 5,361 (20) 816 25,398 Data processing and communications equipment and support software..... 66,319 21,007 (353) 1,280 88,253 Other...................... 5,371 420 (180) (234) 5,377 $127,244 $36,584 $ (784) $2,286 $165,330 Year ended December 31, 1991: Land and improvements...... $ 2,557 $ - $ - $ - $ 2,557 Buildings.................. 40,964 720 (3) (1) 41,680 Construction in progress... 110 6,167 - - 6,277 Leasehold improvements..... 2,671 47 - - 2,718 Office furniture, fixtures and equipment... 25,398 2,331 (97) (20) 27,612 Data processing and communications equipment and support software..... 88,253 26,147 (10,143) 4,064 108,321 Other...................... 5,377 153 (557) 122 5,095 $165,330 $35,565 $(10,800) $4,165 $194,260 Note (1)Includes assets acquired through business acquisitions, foreign currency translation adjustments, transfers and other adjustments. PAGE <48> SCHEDULE V POLICY MANAGEMENT SYSTEMS CORPORATION PROPERTY AND EQUIPMENT (RESTATED) Balance Addi- At tions Other Balance Beginning At Retire- Changes At End of Year Cost ments (1) of Year (In Thousands) Year ended December 31, 1992: Land and improvements...... $ 2,557 $ - $ - $ - $ 2,557 Buildings.................. 41,680 157 - (17) 41,820 Construction in progress... 6,277 9,444 - - 15,721 Leasehold improvements..... 2,718 1,012 (542) 163 3,351 Office furniture, fixtures and equipment... 27,612 2,451 (558) 865 30,370 Data processing and communications equipment and support software..... 108,321 27,146 (18,225) (1,107) 116,135 Other...................... 5,095 1,901 (1,513) (11) 5,472 $194,260 $42,111 $(20,838) $ (107) $215,426 Note (1)Includes assets acquired through business acquisitions, foreign currency translation adjustments, transfers and other adjustments. PAGE <49> SCHEDULE VI POLICY MANAGEMENT SYSTEMS CORPORATION ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT (RESTATED) (UNAUDITED) Balance Addi- At tions Other Balance Beginning To Retire- Changes At End Of Year Expense ments (1) Of Year (In Thousands) Year ended December 31, 1990: Buildings.................. $ 4,545 $ 914 $ (231) $ - $ 5,228 Leasehold improvements..... 1,043 311 - - 1,354 Office furniture, fixtures and equipment... 9,072 2,033 (20) 2 11,087 Data processing and communications equipment and support software..... 34,390 11,606 (290) 232 45,938 Other...................... 3,976 712 (114) (276) 4,298 $53,026 $15,576 $ (655) $ (42) $67,905 Year ended December 31, 1991: Buildings.................. $ 5,228 $ 1,189 $ (3) $ - $ 6,414 Leasehold improvements..... 1,354 450 - 39 1,843 Office furniture, fixtures and equipment... 11,087 2,274 (10) (249) 13,102 Data processing and communications equipment and support software..... 45,938 13,443 (8,657) 12 50,736 Other...................... 4,298 491 (538) 6 4,257 $67,905 $17,847 $(9,208) $(192) $76,352 Note (1)Includes foreign currency translation adjustments, transfers and other adjustments. PAGE <50> SCHEDULE VI POLICY MANAGEMENT SYSTEMS CORPORATION ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT (RESTATED) Balance Addi- At tions Other Balance Beginning To Retire- Changes At End of Year Expense ments (1) of Year (In Thousands) Year ended December 31, 1992: Buildings.................. $ 6,414 $ 1,203 $ - $ - $ 7,617 Leasehold improvements..... 1,843 495 (506) (8) 1,824 Office furniture, fixtures and equipment... 13,102 2,590 (528) 269 15,433 Data processing and communications equipment and support software..... 50,736 19,346 (14,270) (396) 55,416 Other...................... 4,257 475 (1,289) (3) 3,440 $76,352 $24,109 $(16,593) $(138) $83,730 Note (1)Includes foreign currency translation adjustments, transfers and other adjustments. PAGE <51> SCHEDULE X POLICY MANAGEMENT SYSTEMS CORPORATION SUPPLEMENTARY INCOME STATEMENT INFORMATION Year ended December 31, 1992 1991 1990 (Restated) (Restated) (Restated) (Unaudited) (Unaudited) (In Thousands) Amortization of intangible assets: Computer software......................... $22,068 $19,225 $19,990 Intangible assets from business acquisitions............................ 8,527 7,137 5,448 Maintenance and repairs..................... 8,558 4,646 4,311 $39,153 $31,008 $29,749 PAGE <52> ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On January 19, 1993, the Board of Directors, acting on the Audit Committee's recommendation, engaged the accounting firm of Arthur Andersen & Co. to audit the Company's financial statements for the year ended December 31, 1992, replacing the firm of Ernst & Young, which was the principal independent auditor for the Company's two most recent years and subsequent interim period. Ernst & Young's report on the financial statements for the years ended December 31, 1990 and 1991 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. For the two years ended December 31, 1991 and in the subsequent interim period, there have been no disagreements between Ernst & Young and the Company on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which if not resolved to the satisfaction of Ernst & Young would have caused Ernst & Young to make reference to the matter in its report. PAGE <53> PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information other than the listing of Executive Officers of the Company, which is set forth in Part I of this Form 10-K, is contained under the heading "Election of Directors" in the Company's 1993 Proxy Statement and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The section of the Company's 1993 Proxy Statement titled "Compensation Plans and Arrangements" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The sections of the Company's 1993 Proxy Statement titled "Principal Stockholders" and "Election of Directors" are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section of the Company's 1993 Proxy Statement titled "Certain Transactions" is incorporated herein by reference. PAGE <54> PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Financial Statements and Schedules See Index to Consolidated Financial Statements and Supplementary Data on page 24. Exhibits Filed Exhibits required to be filed with this Annual Report on Form 10-K or which have been incorporated herein by reference are listed in the following Exhibit Index. The 1992 Annual Report to stockholders and 1993 Proxy Statement shall be deemed to have been filed only to the extent portions thereof are expressly incorporated herein by reference. Pursuant to Rule 15d-21 promulgated under the Securities Exchange Act of 1934, the following annual report for the Company's employee stock purchase plan will be furnished to the Commission when the information becomes available: Form 11-K for the Company's 401(k) Retirement Savings Plan for the year ended December 31, 1992 is incorporated herein by reference. Form 8-K The Company did not file any reports on Form 8-K during the year ended December 31, 1992. PAGE <55> REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Stockholders Policy Management Systems Corporation Our report, which includes two emphasis paragraphs discussing errors in previously issued financial statements and litigation and a Securities and Exchange Commission investigation, on the consolidated financial statements of Policy Management Systems Corporation and subsidiaries is included on page 25 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related 1992 financial statement schedules on pages 46, 48, 50 and 51 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects, the information required to be included therein. Atlanta, Georgia Coopers & Lybrand L.L.P. September 6, 1994 PAGE <56> SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (REGISTRANT) POLICY MANAGEMENT SYSTEMS CORPORATION BY (SIGNATURE) /s/ Timothy V. Williams Timothy V. Williams, Executive Vice President, Chief Financial Officer DATE November 16, 1994 BY (SIGNATURE) /s/ Stan F. Stoudenmire Stan F. Stoudenmire, Vice President and Corporate Controller DATE November 16, 1994 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. BY (SIGNATURE) /s/ G. Larry Wilson (NAME AND TITLE) G. Larry Wilson, Chairman of the Board of Directors, President and Chief Executive Officer DATE November 16, 1994 BY (SIGNATURE) /s/ Roy L. Faulks (NAME AND TITLE) Roy L. Faulks, Vice Chairman of the Board of Directors DATE November 16, 1994 BY (SIGNATURE) /s/ John P. Seibels (NAME AND TITLE) John P. Seibels, Director DATE November 16, 1994 BY (SIGNATURE) /s/ Frederick B. Karl (NAME AND TITLE) Frederick B. Karl, Director DATE November 16, 1994 BY (SIGNATURE) /s/ Richard G. Trub (NAME AND TITLE) Richard G. Trub, Director DATE November 16, 1994 PAGE <57> SIGNATURES BY (SIGNATURE) /s/ Joseph D. Sargent (NAME AND TITLE) Joseph D. Sargent, Director DATE November 16, 1994 BY (SIGNATURE) /s/ Dr. John M. Palms (NAME AND TITLE) Dr. John M. Palms, Director DATE November 16, 1994 BY (SIGNATURE) Did not sign. (NAME AND TITLE) Joseph M. Henson, Director DATE November 16, 1994 BY (SIGNATURE) Did not sign. (NAME AND TITLE) Steven A. Denning, Director DATE November 16, 1994 EX-99 2 PAGE <1> POLICY MANAGEMENT SYSTEMS CORPORATION EXHIBIT INDEX Exhibit Number 3. ARTICLES OF INCORPORATION AND BY-LAWS A. Articles of Incorporation, as amended, of the Company (Filed as Exhibit 3(a) to Form 10-K for the year ended December 31, 1983 - File No. 0-10175) B. Certified copy of the By-Laws of the Company, as amended (Filed as Exhibit 3(b) to Registration Statement No. 2-79410, dated October 5, 1982) 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES A. Specimen forms of certificates for Common Stock of the Company (Filed as Exhibit 4(a) to Registration Statement No. 2-74821, dated December 16, 1981) B. Articles of Amendment to the Articles of Incorporation of Policy Management Systems Corporation; dated August 23, 1989 (File No. 0-10175 - Filed under cover of Form SE filed on September 22, 1989) 10. MATERIAL CONTRACTS A. Form of Standard Licensing Agreement (Filed as Exhibit 10(a) to Form 10-K for the year ended December 31, 1984 - File No. 0-10175) B. Agreement for the Transfer of Assets for Stock between Seibels, Bruce & Company and Policy Management Systems Corporation dated September 30, 1981 (Filed as Exhibit 10(b) to Registration Statement No. 2-74821, dated December 16, 1981) C. Employment Agreements, with amendments, between the Company and five principal officers of the Company (Filed as Exhibit 10(d) to Registration Statement No. 2-74821, dated December 16, 1981) D. Agreement for Data Processing Services between Seibels, Bruce & Company and the Company effective October 1, 1981, as amended (Filed as Exhibit 10(f) to Form 10-K for the year ended December 31, 1983 - File No. 0-10175) PAGE <2> Exhibit Number E. Form of Tax Allocation Agreement among the Company, Seibels, Bruce & Company, The Seibels Bruce Group, Inc. and all other affiliated companies (Filed as Exhibit 10(g) to Registration Statement No. 2-74821, dated December 16, 1981) F. Stock Purchase Agreements dated August 28, 1981, between the Company and five principal officers (Filed Exhibit 10(h) to Registration Statement No. 2-74821, dated December 16, 1981) G. Shareholder Agreements dated August 28, 1981, between the Company and its five principal officers (Filed as Exhibit 10(i) to Registration Statement No. 2-74821, dated December 16, 1981) H. 1983 Amendments to the 1981 Policy Management Systems Corporation Incentive Stock Option Plan (The 1981 Policy Management Systems Corporation Incentive Stock Option Plan as amended prior to 1983 is incorporated by reference from the Company's Registration Statement on Form S-1 dated December 16, 1981, No. 2-74821.) (Filed as Exhibit 10(n) to Form 10-K for the year ended December 31, 1983 - File No. 0-10175) I. The Policy Management Systems Corporation Stock Purchase Savings Plan for Employees (Filed as Exhibit 10(g) to Registration Statement No. 2-81844, dated February 11, 1983) J. Policy Management Systems Corporation 1984 Stock Option Plan (Filed as Exhibit 10(t) to Registration Statement No. 2-93715, dated October 31, 1984) K. Development Agreement, dated October 24, 1983, between Agency Automation Partners Limited ("Partnership") and the Company; Technology License Agreement, dated October 24, 1983, between Partnership and the Company; First Amendment to Technology License Agreement, dated December 14, 1983, between Partnership and the Company; Lease and Marketing Agreement, dated October 24, 1983, between Partnership and the Company; Purchase Option Agreement, dated October 24, 1983, between Partnership and the Company; Subdevelopment and Submarketing Agreement, dated October 24, 1983, among the Company, Shamrock Automation Systems, Inc. and the Florida Association of Insurance Agents, Inc. (Filed as Exhibit 10(u) to Registration Statement No. 2-93715, dated October 31, 1984) PAGE <3> Exhibit Number L. Policy Management Systems Corporation Employee Stock Ownership Plan (Filed as Exhibit 10(w) to Form 10-K for the year ended December 31, 1985 - File No. 0-10175) M. Policy Management Systems Corporation Profit Sharing Plan (Filed as Exhibit 10(x) to Form 10-K for the year ended December 31, 1985 - File No. 0-10175) N. Policy Management Systems Corporation 1985 Stock Option Plan (Filed as Exhibit 10(y) to Form 10-K for the year ended December 31, 1985 - File No. 0-10175) O. Policy Management Systems Corporation 1985 Employee Stock Purchase Plan (Filed as Exhibit 10(z) to Form 10-K for the year ended December 31, 1985 - File No. 0-10175) P. Modification and Enhancement Agreement, dated August 8, 1985, between Agency Automation Partners Limited ("Partnership") and the Company; Submodification and The Florida Association of Insurance Agents, Inc.; First Amendment to Purchase Option Agreement, dated August 8, 1985, among the Partnership, the Company and SASI; First Amendment to Lease and Marketing Agreement, dated August 8, 1985, between the Partnership and the Company; Second Amendment to Technology License Agreement, dated August 8, 1985, between the Partnership and the Company (Filed as Exhibit 10(dd) to Form 10-K for the year ended December 31, 1985 - File No. 0-10175) Q. Acquisition Agreement between the Company and Commercial Services, Inc. (Filed as Exhibit 10(bb) to form 10-K for the year ended December 31, 1985 - File No. 0-10175) R. Complementary Marketing Assistance Agreement between IBM and the Company (Filed as Exhibit 10(cc) to Registration Statement No. 33-11854, dated February 19, 1987) S. Policy Management Systems Corporation Long-Term Incentive Plan for Executives (Filed as Exhibit 10(dd) to Registration Statement No. 33-11854, dated February 19, 1987) T. Policy Management Systems Corporation 1986 Stock Option Plan (Filed as Exhibit 10(ee) to Form 10-K for the year ended December 31, 1986 - File No. 0-10175) PAGE <4> Exhibit Number U. Policy Management Systems Corporation Long-Term Incentive Plan for Executives (Filed as Exhibit 10(ff) to Registration Statement No. 33-26499, dated January 9, 1989) V. Conformed copy of Stock Purchase Agreement between International Business Machines Corporation and Policy Management Systems Corporation, dated July 26, 1989 (File No. 0-10175 - Filed under cover of Form SE filed on September 22, 1989) W. Conformed copy of Development and Marketing Agreement between International Business Machines Corporation and Policy Management Systems Corporation, dated July 26, 1989 (File No. 0-10175 - Filed under cover of Form SE filed on September 29, 1989) X. Conformed copy of Acquisition Agreement between Policy Management Systems Corporation, Advanced System Applications, Inc. and John W. Blaney, dated November 13, 1989 (File No. 0-10175 - Filed under cover of Form SE on November 28, 1989) Y. Policy Management Systems Corporation 1989 Stock Option Plan (File No. 0-10175 - Filed under cover of Form SE on March 22, 1991) Z. Policy Management Systems Corporation 401(k) Retirement Plan ( File No. 0-10175 - Filed under cover of Form SE on March 22, 1991) 11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (Filed herewith) 13. ANNUAL REPORT TO SECURITY HOLDERS, FORM 10-Q OR QUARTERLY REPORT TO SECURITY HOLDERS 1992 Annual Report to Stockholders (Filed under cover of Form SE on March 19, 1993) 22. SUBSIDIARIES OF THE REGISTRANT (Filed herewith) EX-11 3 PAGE <1> EXHIBIT 11 COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE (RESTATED) (UNAUDITED) Year Ended December 31 1991 1990 Net Income: Net income as reported.................... $47,596,000 $37,166,000 Interest and amortization on convertible debt (net of income taxes).. 1,334,317 3,445,620 Adjusted net income................... $48,930,317 $40,611,620 Shares: Weighted average number of common shares outstanding...................... 21,567,575 19,364,453 Common stock equivalents (stock options)......................... 242,691 508,568 From assumed conversion of convertible debt........................ 1,084,740 2,758,621 Fully diluted shares.................. 22,895,006 22,631,642 Fully diluted net income per share.......... $ 2.14 $ 1.80 EX-22 4 PAGE <1> EXHIBIT 22 LIST OF SUBSIDIARIES OF POLICY MANAGEMENT SYSTEMS CORPORATION Policy Management Systems Canada, Ltd. Policy Management Systems International, Ltd. Policy Management Corporation Policy Management Systems Netherlands B.V. Policy Management Systems Barbados, Ltd. Policy Management Systems Europe, Limited P.M.S., Inc. Policy Management Systems Australia Pty. Limited Policy Management Systems Information and Administration Services, Inc. Portsmouth I.T. Services Limited Policy Management Systems Germany Policy Management Systems Life, Inc. -----END PRIVACY-ENHANCED MESSAGE-----