-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jb1PEDjeY0bkOUEFs9w467cZPCj031uF9AEbcjsAfS9e5ooiHgxGd26DrF5BeXr+ Byo2iMBJc6MOSllhbcodiQ== 0000356226-96-000010.txt : 19961118 0000356226-96-000010.hdr.sgml : 19961118 ACCESSION NUMBER: 0000356226-96-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLICY MANAGEMENT SYSTEMS CORP CENTRAL INDEX KEY: 0000356226 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 570723125 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10557 FILM NUMBER: 96666071 BUSINESS ADDRESS: STREET 1: ONE PMS CTR STREET 2: PO BOX TEN CITY: COLUMBIA STATE: SC ZIP: 29202 BUSINESS PHONE: 8037354000 10-Q 1 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 1996 Commission file number 1-10557 POLICY MANAGEMENT SYSTEMS CORPORATION (Exact name of registrant as specified in its charter) South Carolina 57-0723125 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) One PMSC Center (P.O. Box Ten) Blythewood, S.C. (Columbia, S.C.) 29016 (29202) (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code (803) 735-4000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 18,178,869 Common shares, $.01 par value, as of November 14,1996 The information furnished herein reflects all adjustments which are, in the opinion of management, necessary for the fair presentation of the results for the periods reported. Such information should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 2 POLICY MANAGEMENT SYSTEMS CORPORATION INDEX PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Statements of Income for the three and nine months ended September 30, 1996 and 1995..................................... 3 Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995.......... 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1995. 5 Notes to Consolidated Financial Statements.......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings...................................26 Item 6. Exhibits and Reports on Form 8-K....................27 Signatures....................................................28 3 PART I FINANCIAL INFORMATION POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF INCOME
Three Months Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 (Unaudited) (Unaudited) (In Thousands, Except Per Share Data) Revenues Licensing.......................... $ 24,186 $ 24,518 $ 74,320 $ 72,798 Services........................... 122,812 106,704 343,193 325,346 146,998 131,222 417,513 398,144 Operating expenses Cost of revenues Employee compensation & benefits... 47,192 38,401 131,523 116,448 Computer and communications expenses......................... 7,967 7,160 24,038 21,353 Information services and data acquisition costs........... 29,981 26,806 87,890 88,173 Depreciation and amortization of property, equipment and capitalized software costs....... 12,539 12,683 35,512 36,750 Other costs & expenses............. 13,669 10,984 29,419 30,555 Selling, general and administrative expenses.......................... 18,023 15,734 52,691 47,771 Amortization of goodwill and other intangibles................. 2,616 2,330 7,777 6,715 Litigation settlement and expenses, net.................... - - (9,422) 6,216 Gain on sale of Health business and related assets............... - - - (8,116) Business acquisition charges........ 109 - 99 - Impairment and restructuring credits, net..................... (394) 6 (461) ( 240) 131,702 114,104 359,066 345,625 Operating income .................... 15,296 17,118 58,447 52,519 Other Income and Expenses: Investment income.................. 376 654 1,898 1,612 Interest expense and other charges.......................... (1,475) (658) (3,544) (2,176) (1,099) ( 4) (1,646) (564) Income before income taxes........... 14,197 17,114 56,801 51,955 Income taxes......................... 5,190 5,520 20,363 16,951 Net income........................... $ 9,007 $ 11,594 $ 36,438 $ 35,004 Net income per share................. $ .50 $ .60 $ 1.94 $ 1.81 Weighted average number of shares.... 18,179 19,401 18,747 19,376 See accompanying notes.
4 TABLE POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) (Audited) September 30, December 31, 1996 1995 (In Thousands, Except Share Data) Assets Current assets Cash and equivalents................................... $ 8,030 $ 35,094 Marketable securities.................................. 2,400 4,615 Receivables, net of allowance for uncollectible amounts of $806 ($2,042 at 1995).................. 102,937 95,740 Income tax receivable.................................. 14,908 25,089 Deferred income taxes.................................. 15,770 10,261 Other.................................................. 16,663 17,833 Total current assets................................ 160,708 188,632 Property and equipment, at cost less accumulated depreciation and amortization of $116,589 ($103,568 at 1995).................................. 113,504 109,183 Receivables.............................................. 5,539 5,885 Goodwill and other intangibles assets, net............... 84,352 89,319 Capitalized software costs, net.......................... 170,642 145,982 Deferred income taxes.................................... 1,376 2,335 Investments.............................................. 6,496 4,905 Other.................................................... 5,755 5,492 Total assets..................................... $548,372 $551,733 Liabilities Current liabilities Accounts payable and accrued expenses.................. $ 49,538 $ 70,673 Accrued restructuring charges.......................... 3,875 9,456 Accrued contract termination costs..................... 425 1,154 Current portion of long-term debt...................... - 1,766 Income taxes payable................................... 7,268 10 Unearned revenues...................................... 10,021 11,350 Other.................................................. 32 - Total current liabilities........................... 71,159 94,409 Long-term debt........................................... 57,750 14,873 Deferred income taxes.................................... 62,895 52,701 Accrued restructuring charges............................ 1,940 4,439 Other.................................................... 3,310 2,639 Total liabilities................................... 197,054 169,061 Commitments and contingencies (Note 1) Stockholders' Equity Special stock, $.01 par value, 5,000,000 shares authorized............................................ - - Common stock, $.01 par value, 75,000,000 shares authorized, 18,178,869 shares issued and outstanding (19,436,114 at December 31, 1995)......... 182 194 Additional paid-in capital............................... 106,094 173,402 Retained earnings........................................ 246,551 210,113 Foreign currency translation adjustment.................. (1,509) (1,037) Total stockholders' equity.......................... 351,318 382,672 Total liabilities and stockholders' equity....... $548,372 $551,733 See accompanying notes. 5 CAPTION POLICY MANAGEMENT SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, 1996 1995 (In Thousands) Operation Activities Net income...................................... $ 36,438 $ 35,004 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................. 45,507 44,985 Deferred income taxes......................... 6,342 8,790 Provision for uncollectible accounts.......... 456 262 Changes in assets and liabilities: Accrued restructuring and lease termination costs........................... (8,080) (4,795) Receivables................................... (4,742) (4,988) Income taxes receivable....................... 10,181 4,533 Accounts payable and accrued expenses......... (21,421) (6,201) Income taxes payable.......................... 6,561 1,394 Other, net...................................... (2,001) (8,300) Cash provided by operations................ 69,241 70,684 Investing Activities Proceeds from sales/maturities of marketable securities..................................... 2,850 7,778 Purchases of marketable securities.............. - (3,694) Investment in nonconsolidated affiliate......... (2,315) - Acquisition of property and equipment........... (20,676) (17,579) Capitalized internal software development costs.......................................... (41,953) (32,621) Purchased software.............................. (1,192) (250) Proceeds from disposal of property and equipment...................................... 747 827 Business acquisition............................ (6,777) - Contract acquisition costs...................... - (10,000) Cash (used) by investing activities............................... (69,316) (55,539) Financing Activities Payments on long-term debt...................... (138,693) (6,945) Proceeds from borrowing under credit facility... 179,550 27,678 Issuance of common stock under stock option plans................................... 6,283 2,863 Repurchase of common stock...................... (73,603) - Cash (used) provided by financing activities............................... (26,463) 23,596 Effect of exchange rate changes on cash........... (526) (50) Net (decrease)increase in cash and equivalents..................................... (27,064) 38,691 Cash and equivalents at beginning of period....... 35,094 17,686 Cash and equivalents at end of period............. $ 8,030 $ 56,377 Supplemental Information Interest paid................................... 2,265 1,555 Income taxes (refunded) paid.................... (3,464) 1,456 See accompanying notes.
6 POLICY MANAGEMENT SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1996 NOTE 1. CONTINGENCIES 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 this investigation. The Company is involved in a lawsuit with Security Life of Denver ("SLD") alleging, among other things, breach of a life insurance joint development contract. The Company is also presently involved in litigation with Liberty Life Insurance Company arising out of the Company's change in the direction of its future life software systems development following the acquisition of CYBERTEK. The Company has asserted various affirmative defenses, claims and counterclaims and is vigorously pursuing prompt resolutions of these matters through all available legal processes (see Item 3, Legal Proceedings, of Part I contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1995). In November 1993, the California State Automobile Association Inter-Insurance Bureau and the California State Automobile Association ("CSAA") brought suit against the Company in the United States District Court for the Northern District of California (see Item 3, Legal Proceedings, of Part I contained in the Company's Annual Report on Form 10-K for the Year ended December 31, 1995) In May 1996, after nine weeks of trial, the parties agreed that CSAA would dismiss its claim against the Company in return for the Company dismissing its counterclaim against CSAA. The agreement also resolves a collateral proceeding by the Company against CSAA and Computer Sciences Corporation which was pending in another jurisdiction and arose out of the agreement which was the basis of the California proceeding. 7 Based upon the allegations raised in the CSAA and SLD lawsuits, the Company's insurer, St. Paul Mercury Insurance Company ("St. Paul"), commenced in 1995 a declaratory judgment action against the Company to determine St. Paul's obligation for defense costs and to indemnify the Company for any payment related to these claims. The Company filed a counterclaim against St. Paul seeking to recover the Company's defense costs in the CSAA and SLD matters, coverage for damages, if any, awarded in those matters, and consequential and punitive damages (see Item 3, Legal Proceedings, of Part I contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1995) In connection with the Company reaching an agreement with CSAA for the dismissal of the CSAA matter, St. Paul and the Company agreed to dismiss with prejudice all claims against each other with respect to the CSAA matter, and St. Paul agreed to reimburse the Company for the Company's legal fees in the CSAA matter (in excess of its deductible) with interest. As a result of this recovery, the Company recorded a gain of $9.4 million in the second quarter of 1996. This agreement resolves the Company's and St. Paul's claims related to the CSAA matter; however, the action will continue as to the parties' claims related to insurance coverage for the SLD matter. In addition to the litigation described above, there are also various other litigation proceedings and claims arising in the ordinary course of business. The Company believes it has meritorious defenses and is vigorously defending these matters. While the resolution of any of the above matters could have a material adverse effect on the results of operations in future periods, the Company does not expect these matters to have a material adverse effect on its consolidated financial position. The Company, however, is unable to predict the ultimate outcome or the potential financial impact of these matters. NOTE 2. NEW ACCOUNTING STANDARDS On January 1, 1996, the Company formally adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Assets to be Disposed of" ("SFAS 121"). The Statement requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the expected future cash flows of those assets are less than the assets'carrying amount. SFAS 121 also addresses the accounting for long-lived assets that are expected to be sold or abandoned. As the Company's accounting policies prior to the adoption of SFAS 121 have provided for similar accounting treatment, the effect of adoption was not material to the Company's financial condition or results of operations. 8 Also on January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The Statement requires that companies with stock-based compensation plans either recognize compensation expense based on new fair value accounting methods or continue to apply the provisions of Accounting Principles Board Opinion No. 25 ("APB 25") and disclose pro forma net income and earnings per share assuming the fair value method had been applied. The Company has elected to adopt the disclosure alternative in its annual financial statements and continue accounting for its stock-based compensation plans in accordance with APB 25. NOTE 3. RECLASSIFICATION Certain prior year amounts have been reclassified to conform to current year presentation. NOTE 4. ACQUISITIONS On August 9, 1996, the Company acquired certain assets of Co-Cam Pty Ltd. and related entities ("Co-Cam") for $6.3 million. Co-Cam, whose software and services include superannuation and pension administration systems, operates in Australia, New Zealand, the United Kingdom and certain Southeast Asia nations. The acquisition has been recorded using the purchase method of accounting. 9 POLICY MANAGEMENT SYSTEMS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto contained in Part I of this report on Form 10-Q and with the Company's Annual Report on Form 10-K for the year ended December 31, 1995. RESULTS OF OPERATIONS Set forth below are certain operating items expressed as a percentage of revenues and the percent increase (decrease) for those items between the periods presented:
1996 vs 1995 Percent Increase (Decrease) Percentage Percentage Three Nine of Revenues of Revenues Months Months Three Months Nine Months Ended Ended Ended September 30, Ended September 30, September 30, 1996 1995 1996 1995 Revenues Licensing..................... 16.4 18.7 17.8 18.2 (1.3) 2.1 Services...................... 83.6 81.3 82.2 81.8 15.1 5.5 100.0 100.0 100.0 100.0 12.0 4.9 Operating expenses Cost of revenues Employee compensation and benefits................. 32.1 29.2 31.5 29.2 22.9 12.9 Computer & communication expenses..................... 5.4 5.5 5.8 5.4 11.3 12.6 Information services & data acquisition costs............ 20.4 20.4 21.0 22.1 11.8 (.3) Depreciation & amortization of property, equipment & capitalized software costs... 8.5 9.7 8.5 9.2 (1.1) (3.4) Other costs & expenses......... 9.3 8.4 7.1 7.7 24.4 (3.7) Selling, general & administrative expenses....... 12.3 12.0 12.6 12.0 14.6 10.3 Amortization of goodwill and other intangibles............. 1.8 1.8 1.9 1.7 12.3 15.8 Litigation settlement and expenses, net................. - - (2.3) 1.6 - (100.0) Gain on sale of Health business and related assets... - - - (2.0) - (100.0) Business acquisition charges.... .1 - - - 100.0 - Impairment and restructuring credits, net.................. (.3) - (.1) (.1) (100.0) - 89.6 87.0 86.0 86.8 15.4 3.9 Operating income................ 10.4 13.0 14.0 13.1 (10.6) 11.3 Other income and expenses....... (.7) - (.4) (.1) 100.0 100.0 Income before income taxes...... 9.7 13.0 13.6 13.0 (17.0) 9.3 Income taxes.................... 3.5 4.2 4.9 4.2 (6.0) 20.1 Net income...................... 6.2 8.8 8.7 8.8 (22.3) 4.1
10 THREE MONTHS COMPARISON A comparison of revenues for each line of business and geographic market for the periods presented is as follows:
Three Months Ended September 30, 1996 1995 Change (Dollars in Millions) Line of Business Property & Casualty.... $103.7 $ 96.0 8.0 % Life................... 43.3 35.2 23.0 Geographic Market United States.......... $109.8 $ 98.7 11.2 % International.......... 37.2 32.5 14.5
Revenues
Three Three Months Ended Months Ended Licensing September 30,1996 September 30,1995 Change (Dollars in Millions) Initial charges................ $ 10.1 $ 11.3 (10.6)% Monthly charges................ 14.1 13.2 6.8 % $ 24.2 $ 24.5 (1.2)% Percentage of revenues......... 16.4% 18.7%
Initial license revenues decreased $1.2 million from the third quarter of 1995 to the third quarter of 1996. Life insurance initial licensing revenues increased 86.4% ($2.7 million) from third quarter 1995 to third quarter 1996. These were offset by lower property and casualty licensing revenues, as initial licensing revenues declined by $1.4 million domestically and $2.5 million internationally from the third quarter of 1995 to the third quarter of 1996. Property and casualty licensing revenues in the United States are being impacted by various market factors including heightened focus by many insurance companies on their year 2000 projects and the lack of availability of certain "open" systems architectures in the Company's property and casualty products. The Company has initiatives underway to address these issues including new releases of Series III, Insure 90, Point and Capsil and programs to assist those companies, not currently customers, with near-term year 2000 solutions. 11 Right-to-use charges (excluding further MESA obligations), and termination charges generally (related to the buy-out of monthly license agreements) were insignificant in the third quarter of 1996 and 1995. During the third quarter 1996 one customer accounted for $3.1 million of life insurance initial license charges representing a standard initial license of $1.0 million and a perpetual license of $2.1 million. The customer is paying these charges and its MESA obligations monthly over a six year period. Because a significant portion of initial licensing revenues are recorded at the time new systems are licensed, there can be significant fluctuations in revenue from quarter to quarter. Set forth below is a comparison of initial license revenues for the preceding seven quarters expressed as a percentage of total revenues for each of the periods presented:
1996 1995 1994 3rd 2nd 1st 4th 3rd 2nd* 1st* 4th* (Dollars in Millions) Property and Casualty Initial license revenues $4.2 $6.0 $7.3 $13.8 $8.1 $7.3 $8.0 $5.6 Total revenues 2.9% 4.4% 5.5% 9.9% 6.2% 5.5% 6.0% 5.8% Life Initial license revenues $5.8 $6.0 $3.1 $ 2.3 $3.2 $2.1 $3.7 $1.6 Total revenues 4.0% 4.4% 2.3% 1.7% 2.4% 1.6% 2.8% 1.3% *Excludes licensing activity of the Company's Health Insurance Systems business, sold June 30, 1995. First and second quarter 1995 licensing revenues (initial and monthly licensing charges) related to the Health business were $.6 million and $.3 million, respectively.
12
Three Three Months Ended Months Ended Services September 30,1996 September 30,1995 Change (Dollars In Millions) Professional and outsourcing... $ 81.6 $ 64.7 26.1 % Information.................... 39.7 41.6 ( 4.6)% Other.......................... 1.5 .4 275.0 % $122.8 $106.7 15.1 % Percentage of revenues......... 83.6% 81.3%
Property and casualty professional and outsourcing services revenues increased 26.0% ($13.1 million). Domestic property and casualty professional and outsourcing services revenues increased 23.0% ($7.9 million) due to increases in the volume of services provided to new and existing customers. International property and casualty professional and outsourcing services revenues increased 32.4% ($5.2 million), principally due to services activity of micado, acquired October 1, 1995, Co-Cam Pty Ltd., acquired August 9, 1996 and increases in the volume of services provided to new and existing customers. The growth rate of these services, excluding the impact of the acquisitions, was 16.5%. The life insurance professional and outsourcing services revenue increased 25.7% ($3.7 million) over third quarter 1995, domestic life insurance professional and outsourcing services increased 36.4% ($3.0 million), and international life insurance professional and outsourcing services revenues increased 11.6% ($.7 million), due principally to increased volumes of services to new and existing international customers. Information services revenues decreased 4.6% from third quarter of 1995 to the third quarter of 1996. However, when risk information services (ceased and abandoned operations in the fourth quarter of 1995) are excluded from the comparison, information services revenues increased 11.3%. This increase is due in part to an increase of 6.0% ($.9 million) in life insurance information services principally comprised of attending physician statements and Infinity information services. Also contributing to this increase is an increase in property and casualty information services revenues of 17.2% ($3.4 million) which consists principally of fees for domestic motor vehicle reports as a result of the Company's November 1995 alliance with a leading database information enterprise. 13 OPERATING EXPENSES Cost of Revenues Overall employee compensation and benefits increased 22.9% from third quarter 1995 to third quarter 1996, principally as a result of the increases in both international and domestic development and professional services staffing and the Company's acquisition on October 1, 1995 of micado (compensation expense of $1.6 million for the quarter) and August 9, 1996 of Co-Cam Pty Ltd. (compensation expense of $1.2 million for the quarter). Offsetting these increases was the effect of the Company's divestiture of its risk information services business in December 1995, which lowered compensation and benefits expense by approximately $3.7 million. Computer and communications expenses increased 11.3% principally as a result of lease expense associated with leases entered into as part of the Company's fourth quarter 1995 restructure of its data processing facilities. As part of this restructuring, the Company entered into 2 and 4 year renewable lease agreements for certain data processing equipment, which are intended to enable the Company to make use of the latest technology and improve the quality of service to its customers while allowing the Company to benefit from projected decreases in unit costs of this technology. The increase in lease expense resulting from the restructuring was offset by the decrease in depreciation expense discussed below. Information services and data acquisition costs increased 11.8%, due principally to increases of 14.4% in property and casualty information costs arising from increased volume of motor vehicle reports and 4.8% in life insurance information services, arising from increased volume of attending physician statements. These increases are consistent with the trend in information services revenues as discussed in Revenues above. Depreciation and amortization of property, equipment and capitalized software costs decreased 1.1%. This decrease is principally due to lower depreciation expense resulting from the Company's fourth quarter 1995 restructuring of its data processing facilities. This decrease in depreciation expense was offset in part by an increase in amortization resulting principally from the March 1996 release of the latest version of CyberLife client/server life insurance software. 14 Other operating costs and expenses increased 24.4% Fees associated with the use of consultants and independent contractors increased, principally as a result of training in new technologies and the staffing needs for certain development and services activities. The increase was partially offset by an increase in amounts capitalized principally related to the increased use of outside resources in the continued enhancement and development of the Company's Series III property and casualty insurance software and CyberLife life insurance software as well as other ongoing development projects, and decreased costs associated with the depopulation of certain assigned risk pools serviced by the Company's total policy management business. Selling, general and administrative expenses Selling, general and administrative expenses increased 14.6%, principally because of the Company's investment in its international sales force and infrastructure. Amortization of goodwill and other intangibles The 12.3% increase in amortization of goodwill and other intangibles is principally the result of amortization of intangible assets related to the acquisition of micado on October 1, 1995. OPERATING INCOME Third quarter 1996 operating income decreased 10.6% ($1.8 million) compared with the 1995 third quarter, before the effects of restructuring credits recorded during the third quarter 1996. This decline has largely been caused by the current period increase in expenditures in the Company's international infrastructure, including its sales force, professional services organization and product development areas. Partially offsetting this effect was the increase in the percentage of total revenues represented by professional services from 17.3% of total revenues for third quarter 1995 to 25.2% of total revenues for third quarter 1996. OTHER INCOME AND EXPENSE As a result of a higher average level of borrowed funds, principally borrowings under the Company's credit facilities, interest expense increased $.8 million. The average nominal interest rate applicable to borrowings under these facilities during the third quarter was 6.07%. 15 INCOME TAXES The effective income tax rate (income taxes expressed as a percentage of pre-tax income) was 36.6% and 32.3% for the three months ended September 30, 1996 and 1995, respectively. The effective rate for the third quarter of 1996 is higher than the federal statutory rate principally due to the effect of state and local income taxes; however the effect of state and local income taxes has been offset in part by the effect of the Company's expensing, during 1996 for tax purposes, certain intangible assets related to the abandonment of certain of the Company's domestic property and casualty risk information services activities. The effective rate for 1995 was significantly lower than the federal statutory rate due principally to goodwill, deducted for tax purposes, relating to the sale of the Company's Health Insurance Systems Division. 16 NINE MONTHS COMPARISON A comparison of revenues for each line of business and geographic market for the periods presented is as follows:
Nine Months Ended September 30, 1996 1995 Change (Dollars in Millions) Line of Business Property & Casualty... $291.3 $288.0 1.1% Life.................. 126.2 101.9 23.9 Health................ .* 7.9* Geographic Market United States......... $309.9 $306.3 1.2% International......... 107.6 91.8 17.2 *The Company's Health Insurance Systems business was divested June 30, 1995.
Revenues
Nine Nine Months Ended Months Ended Licensing September 30,1996 September 30,1995 Change (Dollars in Millions) Initial charges................... $32.5 $32.7 ( .6)% Monthly charges................... 41.8 40.1 4.2 % $74.3 $72.8 2.1 % Percentage of revenues............ 17.8% 18.3%
Life insurance initial license charges increased 67.9% ($6.0 million). This increase was offset by a decrease of 25.2% ($5.9 million) in property and casualty initial license charges. However, initial license charges for the first nine months of 1995 included a $4.0 million non-recurring source code license agreement with a cross-industry vendor and $4.7 million related to joint marketing and distribution arrangements with NCR Corporation, formerly AT&T Global Information Solutions. These revenues were replaced in part by a large Series III license executed during the first quarter of 1996, the $3.1 million initial license charge described in the three month comparison, and $2.9 million in initial license charge revenues of micado, acquired October 1, 1995. 17 Initial license charges for the first nine months of 1996 include right-to-use charges (licenses excluding further MESA obligations) of $3.0 million compared to $4.6 million (inclusive of the $4.0 million source code license referred to above) for the first nine months of 1995. Initial license charges for the period also include termination charges (related to the buyout of monthly license charges) of $0 and $1.4 million for the first nine months of 1996 and 1995, respectively.
Nine Nine Months Ended Months Ended Services September 30,1996 September 30,1995 Change (Dollars in Millions) Professional and outsourcing... $221.7 $191.3 15.9 % Information.................... 118.5 132.6 (10.6)% Other.......................... 3.0 1.4 114.3 % $343.2 $325.3 5.5 % Percentage of revenues......... 82.2% 81.7%
Overall professional and outsourcing services revenues increased 15.9% however, when revenues of the Company's health business (sold June 30, 1995) are excluded from the comparison, the increase is 25.6%. Property and casualty professional and outsourcing services revenues increased 16.3% ($23.6 million). Domestic professional and outsourcing revenues increased 9.5%; however, excluding total policy management revenues, domestic professional and outsourcing services revenues increased 23.3% ($13.1 million) principally due to increased volumes of professional services associated with new and existing customers. This increase was offset in part by the effects of depopulation of certain assigned risk pools serviced by the Company's total policy management business and the change to six month policies from twelve month policies of the Florida Joint Underwriting Authority. International professional and outsourcing services revenues increased 31.2% ($14.2 million), principally as a result of the October 1, 1995 acquisition of micado and increased services activity to new and existing customers in other areas of Europe. Life insurance professional and outsourcing services revenues increased overall by 34.2% ($13.7 million). Domestic life insurance professional and outsourcing services revenues increased 56.9% ($11.5 million) principally as a result of an increase in the volume of services provided to new and existing customers, including implementation services and total policy administration services. International life insurance professional and outsourcing services revenues increased 7.3% ($1.4 million), principally in the European and Nordic regions. 18 Information services revenue decreased 10.7%; however, excluding risk information services revenues (ceased and abandoned in the fourth quarter 1995), information services revenues increased 3.4% ($3.9 million). Domestic property and casualty automobile information services revenues were relatively flat for the first nine months of 1996 as compared to the first nine months of 1995, although, principally as a result of the Company's 1995 alliance with a leading database information enterprise, these third quarter 1996 revenues are approximately 26.3% higher than fourth quarter 1995 levels. Life insurance information services revenues increased 7.1%, principally as a result of revenue associated with the Company's Infinity services. OPERATING EXPENSES Cost of Revenues Overall employee compensation and benefits increased 12.9% from the first nine months of 1995 to the first nine months of 1996, principally due to increases in international development and professional services staffing, the October 1, 1995 acquisition of micado ( compensation expense of $4.0 million) and the August 10, 1996 acquisition of Co-Cam Pty. Ltd.(compensation expense of $1.2 million). The effect of the Company's divestitures of its health and risk information services businesses in June 1995 and December 1995, respectively, was to lower compensation and benefits expense by approximately $15.9 million. However, this effect was offset by compensation expense associated with increased domestic development and professional services staffing. Computer and communications expenses increased 12.6%, resulting principally from the effect of licensing expense related to the Company's long-term license and maintenance agreement (entered into March 27, 1995) to acquire rights to certain operating system management software products for use in the Company's worldwide data center operations, and the effect of lease expense associated with leases entered into as part of the Company's restructuring of its data processing facilities discussed in the three month Operating Expense discussion above. Information services and data acquisition costs decreased .3%, due principally to a 2.1% decrease in state fees for motor vehicle reports associated with the Company's domestic property and casualty information services, similar to the trend discussed in Revenues above. This decrease was offset in part by an increase of 5.1% in the volume of expenses for attending physician statements related to the provision of certain life insurance information services. 19 Depreciation and amortization of property, equipment and capitalized software costs decreased 3.4%. This decrease is principally due to lower depreciation expense resulting from the Company's fourth quarter 1995 restructure of its data processing facilities. This decrease in depreciation expense was offset in part by increased amortization resulting principally from the March 1996 release of the latest version of CyberLife client/server life insurance software. Other operating costs and expenses decreased 3.7%. Fees related to the use of consultants and independent contractors increased, principally the result of training costs in new technologies and the satisfaction of staffing needs for certain development and services activities. These increases were offset by an increase in amounts capitalized principally related to the increased use of outside resources in the continued enhancement and development of the Company's Series III property and casualty insurance software and CyberLife life insurance software as well as other ongoing development projects, and decreased costs associated with the depopulation of certain assigned risk pools serviced by the Company's total policy management business. Selling, general and administrative expenses Selling, general and administrative expenses increased 10.3%, principally due to the Company's investment in its international sales force and infrastructure. Litigation settlement and expenses, net In May 1996, the Company resolved its litigation with the California State Automobile Association Inter-Insurance Bureau and the California State Automobile Association ("CSSA"), concluding with an agreement for the mutual dismissal of all related claims and counter claims as well as the Company's recovery of certain defense costs incurred relative to the CSAA matter, with interest. As a result, the Company recorded a $9.4 million gain for this recovery during the second quarter. During the first quarter of 1995, the Company and its insurance carrier agreed to settle amounts contested related to the reimbursement of certain costs incurred by the Company in connection with 1994 settlement of its securities class action. Accordingly, the Company recorded a credit of $1.7 million, in the first quarter of 1995, as a further adjustment to the estimated costs of settling the securities class action which had previously been recorded in the fourth quarter of 1994. 20 The Company, during the second quarter of 1995, provided for $7.9 million in estimated litigation costs arising from certain pending litigation to which the Company was both a defendant and counter-claimant. The costs provided for included, but were not limited to, fees paid or anticipated to be paid to external counsel and other costs related to the Company's defense and claims regarding these matters. Gain on sale of Health business and related assets On June 30, 1995 the Company completed the sale of its Health Insurance Systems Division for a total consideration of $9.3 million cash. After selling expense and other accrued costs the Company recorded a pre-tax gain of $8.1 million. Amortization of goodwill and other intangibles The 15.8% increase in amortization of goodwill and other intangibles is principally the result of amortization of intangible assets related to the acquisition of micado on October 1, 1995. OPERATING INCOME Operating income increased 11.3% ($5.9 million). Excluding the effects of the litigation recovery on the 1996 results, the gain on the sale of the health business and provision for litigation costs on the 1995 results operating income fell by $1.6 million (3.1%). OTHER INCOME AND EXPENSE As a result of a higher average level of borrowed funds, principally borrowings under the Company's credit facilities, interest expense increased $1.4 million. The average nominal interest rate applicable to borrowings under these facilities during the first half was 6.07%. The increased interest costs were offset by a $.3 million increase in investment income, principally related to a higher average level of interest-bearing cash equivalents during the first nine months of 1996 as compared to the same period of 1995. 21 INCOME TAXES The effective income tax rate (income taxes expressed as a percentage of pre-tax income) was 35.9% and 32.6% for the nine months ended September 30, 1996 and 1995, respectively. The effective rate for the 1996 period is higher than the federal statutory rate due principally to the effect of state and local income taxes; however, the effect of state and local income taxes has been offset in part by the effect of the Company's expensing, during 1996 for tax purposes, certain intangible assets related to the abandonment of certain of the Company's domestic property and casualty risk information services activities. The effective rate for 1995 was significantly lower than the federal statutory rate due principally to goodwill, deducted for tax purposes, relating to the sale of the Company's Health Insurance Systems Division. 22 LIQUIDITY AND CAPITAL RESOURCES September 30, December 31, 1996 1995 Cash and equivalents, marketable (Dollars in Millions) securities, and investments......... $ 16.9 $ 44.6 Current assets........................ 160.7 188.6 Current liabilities................... 71.2 94.4 Working capital....................... 89.5 94.2 Long-term debt........................ 57.7 14.9 Nine months Nine months ended ended September 30, September 30, 1996 1995 (Dollars in Millions) Cash provided by operations........... $ 69.2 $ 70.7 Cash used for investing activities.... (69.3) (55.5) Cash used for financing activities.... (26.5) 23.6 The Company's current ratio (current assets divided by current liabilities) stood at 2.3 at September 30, 1996, which management believes is sufficient when combined with the available credit facilities to provide for day-to-day operating needs and the flexibility to take advantage of investment opportunities. The Company has available under its credit facilities (net of amounts outstanding at September 30, 1996) $100.0 million under its 364 day $100.0 million facility and $43.0 million under its 3 year $100.0 million facility, should management choose debt financing for any of the Company's operating, investing or financing activities. Also, the Company has available an uncommitted $10.0 million operating line of credit with which it may choose to fund temporary operating cash needs. Cash provided by operations decreased $1.5 million from September 30, 1995 to September 30, 1996. During the first nine months of 1996, the Company paid a significant amount of costs previously accrued in 1995 related to its ongoing legal proceedings. In the third quarter of 1996 the Company made a cash payment of $3.1 million relating to a 1995 business acquisition. Additionally, the Company made cash payments of $6.8 million against its restructuring reserves, as well as other accrued items in the normal course of business. 23 During the nine months ended September 30, 1996 the Company capitalized $42.0 million principally related to the development of its Series III client/server property and casualty software (including the incorporation of object-oriented technology and support for Microsoft Windows) and CyberLife object-oriented client/server life insurance software, as well as other ongoing projects for other domestic as well as international products. Also, during the second quarter of 1996, the Company repurchased 1.4 million of its outstanding common shares at an aggregate cost of $73.6 million. Significant expenditures anticipated for the remainder of 1996, excluding any possible business acquisitions or common share repurchases, are as follows: acquisition of data processing, communications equipment and office furniture, fixtures and equipment ($7.0 million); costs relating to the internal development of software systems ($15.0 million); and payments relating to past business acquisitions ($3.1 million). The Company has historically used the cash generated from operations for the following: development and acquisition of new products, acquisition of businesses and repurchase of the Company's stock. The Company anticipates that it will continue to use its cash for all of these purposes in the future and that projected cash from operations, cash and investment reserves along with amounts available under the Company's debt facilities will be sufficient to meet presently anticipated operating needs and to accomplish specific objectives in these areas and for other general corporate purposes. 24 FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's operating results and financial condition can be impacted by a number of factors, including, but not limited to, the following, any of which could cause actual results to vary materially from current and historical results or the Company's anticipated future results: - - Currently, the Company's business is focused principally within the global property and casualty and life insurance industries; - - There is increasing competition for the Company's products and services; - - The market for the Company's products and services is characterized by rapid changes in technology; - - Contracts with governmental agencies involve a variety of special risks, including the risk of early contract termination by the governmental agency and changes associated with newly elected state administrations or newly appointed regulators; - - The timing and amount of the Company's revenues are subject to a number of factors, including, but not limited to, the timing of customers' decisions to enter into large license agreements with the Company; - - Unforeseen events or adverse economic or business trends may significantly increase cash demands beyond those currently anticipated or affect the Company's ability to generate/raise cash to satisfy financing needs; - - The Company's operations have not proven to be significantly seasonal, although quarterly revenues and net income could be expected to vary at times; - - 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 operation expenses. - - Many of the Company's current and potential customers are or will spend significant amounts of money to make their existing information systems capable of handling the year 2000. 25 The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Changes in the status of certain matters or facts or circumstances underlying these estimates could result in material changes in these estimates, and actual results could differ from these estimates. Because of the foregoing factors, as well as other factors affecting the Company's operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995:Statements in this report that are not descriptions of historical facts may be forward-looking statements that are subject to risks and uncertainties, including economic, competitive and technological factors affecting the Company's operations, markets, products, services and prices, as well as other specific factors discussed in the Company's fillings with the Securities and Exchange Commission. These and other factors may cause actual results to differ materially from those anticipated. 26 PART II OTHER INFORMATION POLICY MANAGEMENT SYSTEMS CORPORATION Item 1. Legal Proceedings 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 this investigation. The Company is involved in a lawsuit with Security Life of Denver ("SLD") alleging, among other things, breach of a life insurance joint development contract. The Company is also presently involved in litigation with Liberty Life Insurance Company arising out of the Company's change in the direction of its future life software systems development following the acquisition of CYBERTEK. The Company has asserted various affirmative defenses, claims and counterclaims and is vigorously pursuing prompt resolutions of these matters through all available legal processes (see Item 3, Legal Proceedings, of Part I contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1995). In November 1993, the California State Automobile Association Inter-Insurance Bureau and the California State Automobile Association ("CSAA") brought suit against the Company in the United States District Court for the Northern District of California (see Item 3, Legal Proceedings, of Part I contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1995). In May 1996, after nine weeks of trial, the parties agreed that CSAA would dismiss its claim against the Company in return for the Company dismissing its counterclaim against CSAA. The agreement also resolves a collateral proceeding by the Company against CSAA and Computer Sciences Corporation which is pending in another jurisdiction and arose out of the agreement which was the basis of the California proceeding. Based upon the allegations raised in the CSAA and SLD lawsuits, the Company's insurer, St. Paul Mercury Insurance Company ("St. Paul"), commenced a declaratory judgment action against the Company to determine St. Paul's obligation for defense costs and to indemnify the Company for any payment related to these claims. The Company filed a counterclaim against St. Paul seeking to recover the Company's defense costs in the CSAA and SLD matters, coverage for damages, if any, awarded in those matters, and consequential and punitive damages (see Item 3, Legal Proceedings, of Part I contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 27 In connection with the Company reaching an agreement with CSAA for the dismissal of the CSAA matter, St. Paul and the Company agreed to dismiss with prejudice all claims against each other with respect to the CSAA matter, and St. Paul agreed to reimburse the Company the Company's legal fees in the CSAA matter (in excess of its deductible) with interest. As a result of this recovery, the Company recorded a gain of $9.4 million in the second quarter of 1996. This agreement resolves the Company's and St. Paul's claims related to the CSAA matter; however, the action will continue as to the parties' claims related to insurance coverage for the SLD matter. In addition to the litigation described above, there are also various other litigation proceedings and claims arising in the ordinary course of business. The Company is vigorously pursuing prompt resolutions of these matters through all available legal processes. Items 2, 3, 4, and 5 are not applicable Item 6. Exhibits and Reports on Form 8-K. Exhibits Exhibits required to be filed with this Quarterly Report on Form 10-Q are listed in the following Exhibit Index. Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended September 30, 1996. 28 POLICY MANAGEMENT SYSTEMS CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. POLICY MANAGEMENT SYSTEMS CORPORATION (Registrant) Date: November 14 , 1996 By: Timothy V. Williams Executive Vice President (Chief Financial Officer) 29 Policy Management Systems Corporation Exhibit Index Exhibit Number 10. MATERIAL CONTRACTS A. Amendment No.3 to 364-Day Credit Agreement dated August 9, 1996 among Policy Management Systems Corporation and Morgan Guaranty Trust Company of New York. 11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS 27. FINANCIAL DATA SCHEDULE EX-10 2 1 [EXECUTION COPY] AMENDMENT NO. 3 TO 364-DAYCREDIT AGREEMENT AMENDMENT No. 3 dated as of August 9, 1996 among POLICY MANAGEMENT SYSTEMS CORPORATION (the "Borrower"), the BANKS listed on the signature pages hereof and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent. W I T N E S S E T H : WHEREAS, the parties hereto have heretofore entered into a 364-Day Credit Agreement dated as of August 11, 1995 (as amended, the "Agreement"); and WHEREAS, the Borrower has asked the Banks, and the Banks are willing, on the terms and conditions set forth below, to amend the Agreement as set forth herein; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Definitions. Unless otherwise specifically defined herein, each term used herein that is defined in the Agreement shall have the meaning assigned to such term in the Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Agreement shall from and after the date hereof refer to the Agreement as amended hereby. SECTION 2. Amendment of the Definition of Debt. The definition of "Debt" set forth in Section 1.1 of the Agreement is amended to read in its entirety as follows: "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except (x) trade accounts payable arising in the ordinary course of business, (y) any other accrued expenses incurred in the ordinary course of 2 business and (z) payment of amounts pursuant to "contingent earn-out" or similar provisions the payment of which amounts is contingent upon the achievement of good faith performance targets, but only to the extent that such payment is not, or would not be reflected as, a liability on the balance sheet of such Person at such date, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all non-contingent obligations (and, for purposes of Section 5.9 (a), (f) and (k) and the definitions of Material Debt and Material Financial Obligations, all contingent obligations) of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit, (vi) all obligations of such Person with respect to Designated Swaps, but only to the extent that such obligations are, or would be reflected as, a liability on the balance sheet of such Person at such date, (vii) all Debt secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person and (viii) all Debt of others Guaranteed by such Person. It is understood that the payment obligations of the Borrower to a counterparty under any equity swap (each such swap, a "Designated Swap") to be entered into between it and the Borrower with respect to shares of outstanding common stock of the Borrower in connection with the Borrower's share repurchase program shall not constitute "Debt" except as set forth in clause (vi) of the definition of Debt. SECTION 3. Extension of the Termination Date. The definition of "Termination Date" contained in Section 1.1 of the Agreement is amended by substituting the date "August 8, 1997" for the date "August 9, 1996" set forth therein. SECTION 4. Additional Permitted Temporary Cash Investments. The definition of "Temporary Cash Investments" set forth in Section 1.1 of the Agreement is amended to read in its entirety as follows: "Temporary Cash Investment" means any Investment in (i) direct obligations of the United States or any agency thereof or the Commonwealth of Australia, or obligations guaranteed by the United States or any agency thereof or the Commonwealth of Australia, (ii) commercial paper rated at least A-1 by Standard & Poor's Rating Group and P-1 by Moody's Investors Service, Inc., (iii) time deposits with, including certificates of deposit issued by, any office located in the United States of (x) any Bank or (y) any bank or trust company which is organized under the laws of the United States or any state thereof or the United Kingdom and has capital, surplus and undivided profits aggregating at least $750,000,000, (iv) repurchase agreements with respect to securities described in clause (i) above entered into with an office of a bank or trust company meeting the criteria specified 3 in clause (iii) above, (v) municipal bonds issued by municipalities located in the United States rated at least A or the equivalent thereof by Standard & Poor's Rating Group or A2 or the equivalent thereof by Moody's Investors Service, Inc. and, if such bonds are rated by both such agencies, then at least A or the equivalent thereof by Standard & Poor's Rating Group and A2 or the equivalent thereof by Moody's Investors Service, Inc. and (vi) Debt securities of any Person which are rated at least A or the equivalent thereof by Standard & Poor's Rating Group or A2 or the equivalent thereof by Moody's Investors Service, Inc. and, if such Debt securities are rated by both such agencies, then at least A or the equivalent thereof by Standard & Poor's Rating Group and A2 or the equivalent thereof by Moody's Investors Service, Inc.; provided that any Investment described in clauses (i), (ii), (iii) or (iv) matures within one year from the date of acquisition thereof by the Borrower or a Subsidiary and any Investment described in clause (vi) matures within 90 days from the date of acquisition thereof by the Borrower or a Subsidiary. SECTION 5. Increase in Amount of Certain Permitted Subsidiary Debt. The proviso in clause (c) of Section 5.10 of the Agreement is amended to read in its entirety as follows: "provided that the aggregate principal amount of Debt of each such wholly-owned Subsidiary outstanding at any time and permitted by this clause (c) (net of the aggregate amount of Debt owed to such wholly-owned Subsidiary by the Borrower or any other wholly-owned Subsidiary) does not exceed $15,000,000. For purposes of this clause (c), (1) the "Debt" owed by any wholly-owned Subsidiary shall include, subject to clause (3) below, any intercompany loans of or advances made to such Subsidiary and regardless of whether such loans or advances constitute "Debt" as defined in Section 1.1, intercompany accounts payable of such Subsidiary or otherwise, (2) the "Debt" owed to any wholly-owned Subsidiary shall include any amounts payable to such Subsidiary with respect to intercompany loans or advances made by such Subsidiary and regardless of whether such payments constitute intercompany accounts receivables of such Subsidiary or otherwise and (3) the "Debt" of a Subsidiary of the Borrower shall not include an amount up to 8,000,000 Australian Dollars owed by such Subsidiary to the Borrower and incurred by such Subsidiary solely for the purpose of consummating the acquisition of certain assets of Co-Cam Pty Ltd., Co-Cam Wholesale Pty Ltd., Co-Cam Asia Pty Ltd., Co-Cam Financial Systems Pty Ltd., Co-Cam Custom Software Pty Ltd., and Auz-Com Technologies Pty Ltd., each an Australian corporation, Co-Cam New Zealand Ltd., a New Zealand corporation, and Co-Cam Computer Services (UK) Ltd., a United Kingdom corporation. SECTION 6. Increase in Minimum Cash Flow Ratio. Section 5.11 of the Agreement is amended by substituting the ratio ".4:1" for the ratio ".25:1" set forth therein. SECTION 7. Increase in Minimum Consolidated Tangible Net Worth. Section 5.13 of the Agreement is amended by substituting the amount "$175,000,000" for the amount "$162,500,000" set forth in the first sentence thereof. 4 SECTION 8. Increase in Amount of Certain Permitted Investments. Clauses (c) and (d) of Section 5.15 of the Agreement are amended to read in their entirety as follows: "(c) Investments in any customer of the Borrower or any of its Subsidiaries (or in any other Person the accounts of which would be consolidated with those of such customer in such customer's consolidated financial statements if such statements were prepared as of the date such Investments are made) which are characterized as "inducements" and are made in connection with long term processing contracts entered into by the Borrower or such Subsidiary with such customer; and (d) any Investment not otherwise permitted by the foregoing clauses of this Section if, immediately after such Investment is made or acquired, the aggregate net book value of all Investments permitted by this clause (d) and outstanding at such time does not exceed $40,000,000.". SECTION 9. Substitution of Banks. A new Section 8.6 to the Agreement is added immediately after Section 8.5 thereof, to read in its entirety as follows: SECTION 8.6. Substitution of Bank. If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.2 or (ii) any Bank has demanded compensation under Section 8.3 or 8.4, the Borrower shall have the right, with the assistance of the Agent, to seek a mutually satisfactory substitute bank or banks (which may be one or more of the Banks) to purchase the Note and assume the Commitment of such Bank. SECTION 10. New Pricing Schedule. The Pricing Schedule to the Agreement is amended to read in its entirety as set forth on the Pricing Schedule attached hereto. SECTION 11. Release of Guarantor. Effective as of the date hereof, Policy Management Systems Canada, Ltd. shall cease to be a "Guarantor" under the Agreement and shall be released from all of its obligations thereunder. SECTION 12. Counterparts; Effectiveness. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Amendment shall become effective as of August 9, 1996 upon receipt by the Agent of duly executed counterparts hereof signed by the Borrower and the Banks. 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. POLICY MANAGEMENT SYSTEMS CORPORATION, POLICY MANAGEMENT SYSTEMS CANADA, LTD. CYBERTEK CORPORATION, POLICY MANAGEMENT SYSTEMS INTERNATIONAL.LTD.PMSI, L.P. By POLICY MANAGEMENT SYSTEMS CORPORATION; its General Partner CYBERTEK SOLUTIONS, L.P. By POLICY MANAGEMENT SYSTEMS CORPORATION; its General Partner By _________________________ Name: Title: POLICY MANAGEMENT SYSTEMS INVESTMENTS,INC. By _________________________ Name: Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK By _________________________ Name: Title: 6 FIRST UNION NATIONAL BANK OF SOUTH CAROLINA By ____________________ Name: Title: WACHOVIA BANK OF SOUTH CAROLINA, N.A. By _____________________ Name: Title: BANK OF AMERICA ILLINOIS By ____________________ Name: Title: COMMERZBANK AKTIENGESELLSCHAFT, ATLANTA AGENCY By _________________________ Name: Title: By _________________________ Name: Title: 7 THE DAI-ICHI KANGYO BANK LTD., ATLANTA AGENCY By _________________________ Name: Title: NBD BANK By _____________________ Name: Title: DEUTSCHE BANK AG NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By_________________________ Name: Title: By _________________________ Name: Title: THE FUJI BANK, LIMITED, ATLANTA AGENCY By _________________________ Name: Title: 8 PRICING SCHEDULE Each of "Euro-Dollar Margin", "CD Margin" and "Facility Fee Rate" means, for any date, the rates set forth below in the row opposite such term and the Usage on such date and in the column corresponding to "Level I": Level I CD Margin Usage < Usage >OR= 0.5375% 0.6375% Euro-Dollar Margin Usage < Usage >OR= 0.4125% 0.5125% Facility Fee Rate 0.1875% For purposes of this Schedule, the following terms have the following meanings: "Level I Pricing" applies at any date. "Usage" means at any date a fraction (i) the numerator of which is the aggregate outstanding principal amount of the Loans at such date, after giving effect to any borrowing or payment on such date, and (ii) the denominator of which is the aggregate amount of the Commitments at such date, after giving effect to any reduction of the Commitments on such date. For purposes of this Schedule, if for any reason any Loans remain outstanding after termination of the Commitments, the Usage for each date on or after the date of such termination shall be deemed to be greater than . 9 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. POLICY MANAGEMENT SYSTEMS CORPORATION, POLICY MANAGEMENT SYSTEMS CANADA, LTD. CYBERTEK CORPORATION POLICY MANAGEMENT SYSTEMS INTERNATIONAL, LTD. PMSI, L.P. By POLICY MANAGEMENT SYSTEMS CORPORATION; its General Partner CYBERTEK SOLUTIONS, L.P. By POLICY MANAGEMENT SYSTEMS CORPORATION; its General Partner By ______________________ Name: Title: POLICY MANAGEMENT SYSTEMS INVESTMENTS,INC. By ______________________ Name: Title: 10 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By ______________________ Name: Title: FIRST UNION NATIONAL BANK OF SOUTH CAROLINA By ______________________ Name: Title: WACHOVIA BANK OF SOUTH CAROLINA, N.A. By ______________________ Name: Title: BANK OF AMERICA ILLINOIS By ______________________ Name: Title: 11 COMMERZBANK AKTIENGESELLSCHAFT, ATLANTA AGENCY By ______________________ Name: Title: By ______________________ Name: Title: THE DAI-ICHI KANGYO BANK LTD., ATLANTA AGENCY By ______________________ Name: Title: NBD BANK By ______________________ Name: Title: 12 DEUTSCHE BANK AG NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By ______________________ Name: Title: By ______________________ Name: Title: THE FUJI BANK, LIMITED, ATLANTA AGENCY By ______________________ Name: Title: EX-11 3
Exhibit 11 Statement Regarding Computation of Per Share Earnings Three Months Nine Months Ended September 30, Ended September 30, 1996 1995 1996 1995 (In Thousands, Except Per Share Data) Primary net income per share Net income: Net income as reported $ 9,007 $11,594 $36,438 $35,004 Weighted average number of common shares outstanding 18,179 19,401 18,747 19,376 Common stock equivalents - - - - Primary shares 18,179 19,401 18,747 19,376 Primary net income per share $ .50 .60 1.94 1.81 Fully diluted net income per share Net income as reported $ 9,007 $11,594 $36,438 $35,004 Weighted average number of common shares outstanding 18,179 19,401 18,747 19,376 Common stock equivalents 107 403 744 931 Fully diluted shares 18,286 19,804 19,491 20,307 Fully diluted net income per share $ .49 .59 1.87 1.72
EX-27 4
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS OF POLICY MANAGEMENT SYSTEMS CORPORATION AS OF AND FOR THE NINE MONTHS ENDED SEPT 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1996 SEP-30-1996 8030 2400 103743 806 0 160708 230093 116589 548372 71159 57750 0 0 182 351136 548372 417513 417513 0 359066 0 0 3544 56801 20363 36438 0 0 0 36438 1.94 1.94
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