10-Q 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 2000 Commission file number 1-10557 MYND CORPORATION (FORMERLY POLICY MANAGEMENT SYSTEMS CORPORATION) (Exact name of registrant as specified in its charter) SOUTH CAROLINA 57-0723125 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) ONE MYND CENTER (PO BOX TEN) BLYTHEWOOD, SC (COLUMBIA, SC) 29016 (29202) (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (803) 333-4000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 35,584,517 Common shares, $.01 par value, as of November 3, 2000. The information furnished herein reflects all adjustments which are, in the opinion of management, necessary for the fair presentation of the results for the periods reported. Such information should be read in conjunction with the Company's Annual Report on Form 10-K/A for the year ended December 31, 1999. 1 MYND CORPORATION (FORMERLY POLICY MANAGEMENT SYSTEMS CORPORATION) INDEX PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2000 and 1999 . . . . . . . . 3 Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 . . . . . . . . . . . . . . . . . . . . . . 4 Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income for the Nine Months Ended September 30, 2000 . . . . . . . . . . . . . . . 5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 . . . . . . . . 6 Notes to Consolidated Financial Statements. . . . . . . . . . 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 37 Item 4. Submission of matters to a vote of Security Holders. . . 37 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . 37 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 2
PART I FINANCIAL INFORMATION MYND CORPORATION (FORMERLY POLICY MANAGEMENT SYSTEMS CORPORATION) CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Nine Months Ended September 30, Ended September 30, ----------------------- ----------------------- 2000 1999 2000 1999 ----------- ---------- ------------ --------- (In thousands, except per share data) REVENUES Licensing. . . . . . . . . . . . . . . $ 28,129 $ 37,383 $ 80,636 $115,846 Services . . . . . . . . . . . . . . . 112,117 131,405 348,026 386,763 ------------ ---------- ----------- --------- 140,246 168,788 428,662 502,609 ------------ ---------- ----------- --------- OPERATING EXPENSES Cost of revenues Employee compensation and benefits. . 68,934 78,686 223,444 228,729 Computer and communications expenses. 13,628 12,654 41,075 36,336 Depreciation and amortization of property, equipment and capitalized software costs . . . . . 14,246 108,543 51,514 141,794 Other costs & expenses. . . . . . . . 16,126 15,228 38,169 32,030 Selling, general and administrative expenses . . . . . . . . . . . . . . 23,581 29,230 78,401 83,164 Amortization of goodwill and other intangibles. . . . . . . . . . 3,629 9,978 10,798 16,516 Restructuring and other charges. . . . 8,564 22,159 24,591 22,159 Merger termination charges . . . . . . 932 - 25,279 - ------------ ---------- ----------- --------- 149,640 276,478 493,271 560,728 ------------ ---------- ----------- --------- OPERATING LOSS. . . . . . . . . . . . . (9,394) (107,690) (64,609) (58,119) Equity in earnings of unconsolidated affiliates. . . . . . 227 320 938 609 Minority interest . . . . . . . . . . . 62 (14) 101 (94) Other income and expenses: Investment income . . . . . . . . . . 309 239 6,385 674 Interest expense and other charges. . (9,009) (3,564) (22,487) (7,804) ------------ ---------- ----------- --------- (8,700) (3,325) (16,102) (7,130) ------------ ---------- ----------- --------- Loss before tax benefit . . . . . . . . (17,805) (110,709) (79,672) (64,734) Tax benefit . . . . . . . . . . . . . . (7,415) (40,261) (14,253) (23,249) ------------ ---------- ----------- --------- NET LOSS. . . . . . . . . . . . . . . . $ (10,390) $ (70,448) $ (65,419) $(41,485) ============ ========== =========== ========= BASIC LOSS PER SHARE. . . . . . . . . . $ (0.29) $ (1.99) $ (1.85) $ (1.16) ============ ========== =========== ========= DILUTED LOSS PER SHARE. . . . . . . . . $ (0.29) $ (1.99) $ (1.85) $ (1.16) ============ ========== =========== ========= Weighted average common shares. . . . . 35,379 35,355 35,378 35,610 Weighted average common shares assuming dilution . . . . . . . . . . 35,379 35,355 35,378 35,610 See accompanying notes
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MYND CORPORATION (FORMERLY POLICY MANAGEMENT SYSTEMS CORPORATION) CONSOLIDATED BALANCE SHEETS (Unaudited) (Audited) September 30, December 31, 2000 1999 --------------- -------------- (In thousands, except share data) Assets Current assets Cash and equivalents . . . . . . . . . . . . . . $ 19,862 $ 17,744 Receivables, net of allowance for uncollectible amounts of $5,097 ($13,000 at December 31, 1999) 96,080 99,669 Accrued revenues. . . . . . . . . . . . . . . . 23,898 36,393 Deferred income taxes. . . . . . . . . . . . . . 17,308 15,979 Income tax receivable. . . . . . . . . . . . . . - 9,728 Other receivable . . . . . . . . . . . . . . . . - 7,788 Prepaids . . . . . . . . . . . . . . . . . . . . 13,186 12,050 Other. . . . . . . . . . . . . . . . . . . . . . 14,329 11,886 --------------- -------------- Total current assets . . . . . . . . . . . . . 184,663 211,237 Property and equipment, at cost less accumulated depreciation and amortization of $128,218 ($132,347 at December 31, 1999). . . . . . . . . 131,353 142,867 Accrued revenues. . . . . . . . . . . . . . . . . 20,877 16,032 Income tax receivable . . . . . . . . . . . . . . 4,838 4,804 Goodwill and other intangibles, net . . . . . . . 101,415 111,024 Capitalized software costs, net . . . . . . . . . 155,485 155,895 Deferred income taxes . . . . . . . . . . . . . . 27,305 29,850 Investments . . . . . . . . . . . . . . . . . . . 6,147 13,332 Other . . . . . . . . . . . . . . . . . . . . . . 21,127 21,247 --------------- -------------- Total assets . . . . . . . . . . . . . . . . $ 653,210 $ 706,288 =============== ============== Liabilities Current liabilities Accounts payable and accrued expenses . . . . . $ 44,792 41,236 Notes payable 21,000 - Current portion of long-term debt. . . . . . . . 250,000 4,000 Income taxes payable . . . . . . . . . . . . . . 666 4,616 Unearned revenues. . . . . . . . . . . . . . . . 19,218 20,290 Accrued restructuring and other charges. . . . . 6,388 3,630 Other. . . . . . . . . . . . . . . . . . . . . . 1,665 2,223 --------------- -------------- Total current liabilities. . . . . . . . . . . 343,729 75,995 Long-term debt. . . . . . . . . . . . . . . . . . - 227,000 Deferred income taxes 53,573 68,514 Accrued restructuring and other charges . . . . . 2,717 2,659 Other . . . . . . . . . . . . . . . . . . . . . . 8,922 9,935 --------------- -------------- Total liabilities . . . . . . . . . . . . . . 408,941 384,103 --------------- -------------- Minority interest . . . . . . . . . . . . . . . . 500 624 Stockholders' equity Special stock, $.01 par value, 5,000,000 shares authorized . . . . . . . . . . . . . . . . . . . - - Common stock, $.01 par value, 75,000,000 shares authorized, 35,584,517 shares issued and outstanding (35,585,078 at December 31, 1999). . 356 356 Additional paid-in capital. . . . . . . . . . . . 56,763 56,695 Retained earnings . . . . . . . . . . . . . . . . 222,064 287,483 Accumulated other comprehensive income. . . . . . (25,748) (12,972) Stock employee compensation trust . . . . . . . . (9,666) (10,001) --------------- -------------- Total stockholders' equity. . . . . . . . . . 243,769 321,561 --------------- -------------- Total liabilities and stockholders' equity . . . $ 653,210 $ 706,288 =============== ============== See accompanying notes
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MYND CORPORATION (FORMERLY POLICY MANAGEMENT SYSTEMS CORPORATION) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Unaudited) Stock Accumulated Employee Additional Other Compen- Common Paid-In Retained Comprehensive sation Stock Capital Earnings Income(1) Trust Total ------ -------- ---------- ---------- --------- --------- (Dollars in thousands) BALANCE, DECEMBER 31, 1999. . $ 356 $ 56,695 $ 287,483 $ (12,972) $(10,001) $321,561 Comprehensive income Net loss . . . . . . . . . . - - (65,419) - - (65,419) Other comprehensive income, net of tax: Foreign currency translation adjustments . - - - (12,776) - (12,776) --------- Total comprehensive income. . (78,195) --------- Restricted stock. . . . . . . - 52 - - 335 387 Stock options exercised (1,168 shares). . . . . . . - 16 - - - 16 ------ -------- ---------- ---------- --------- --------- BALANCE, SEPTEMBER 30, 2000 . $ 356 $ 56,763 $ 222,064 $ (25,748) $ (9,666) $243,769 ====== ======== ========== ========== ========= ========= See accompanying notes (1) Comprehensive income (loss) for the three months ended September 30, 2000 and 1999 was $(16,355) and $(67,519), respectively. Comprehensive income (loss) for the nine months ended September 30, 1999 was $(41,559).
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MYND CORPORATION (FORMERLY POLICY MANAGEMENT SYSTEMS CORPORATION) CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, ---------------------- 2000 1999 ---------- ---------- (In thousands) Operating Activities Net loss . . . . . . . . . . . . . . . . . . . . . $ (65,419) $ (41,485) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization. . . . . . . . . . 67,655 163,085 Deferred income taxes. . . . . . . . . . . . . . (13,725) (31,324) Provision for uncollectible accounts . . . . . . 3,279 513 Loss on disposal of property and equipment . . . 1,123 1,018 Gain on sale of investments. . . . . . . . . . . (5,262) - Changes in assets and liabilities: Receivables. . . . . . . . . . . . . . . . . . . (911) (10,424) Accrued revenues . . . . . . . . . . . . . . . . 7,650 (20,195) Other receivable . . . . . . . . . . . . . . . . 7,788 11,279 Accounts payable and accrued expenses. . . . . . 2,434 (14,560) Accrued restructuring and other charges. . . . . 3,925 13,200 Income taxes . . . . . . . . . . . . . . . . . . 5,744 (3,033) Unearned revenues (1,072) 1,772 Other, net . . . . . . . . . . . . . . . . . . . (5,144) (9,555) ---------- ---------- Cash provided by operations . . . . . . . . . 8,065 60,291 ---------- ---------- Investing Activities Acquisition of property and equipment. . . . . . . (13,910) (28,532) Capitalized internal software development costs. . (36,641) (50,476) Business acquisition and investments . . . . . . . (6,793) (68,053) Proceeds from sale of investments. . . . . . . . . 18,308 1,969 Other. . . . . . . . . . . . . . . . . . . . . . . (3,227) (5,888) ---------- ---------- Cash used by investing activities . . . . . . (42,263) (150,980) ---------- ---------- Financing Activities Payments on long-term debt . . . . . . . . . . . . (145,025) (219,312) Proceeds from borrowing under credit facility. . . 166,025 348,900 Purchase of stock for Stock Employee . . . . . . . Compensation Trust. . . . . . . . . . . . . . . . - (10,094) Issuance of common stock under stock option plans. 16 7,104 Proceeds from note payable . . . . . . . . . . . . 19,000 - Repurchase of common stock . . . . . . . . . . . . - (33,045) Other . . . . . . . . . . . . . . . . . . . . . . (3,700) - ---------- ---------- Cash provided by financing activities. . . . 36,316 93,553 ---------- ---------- Net increase in cash and equivalents. . . . . . . . 2,118 2,864 Cash and equivalents at beginning of period . . . . 17,744 26,013 ---------- ---------- Cash and equivalents at end of period . . . . . . . $ 19,862 $ 28,877 ========== ========== Supplemental Information Interest paid. . . . . . . . . . . . . . . . . . . $ 16,955 $ 6,494 Income taxes (refunded) paid . . . . . . . . . . . (4,507) 6,745 See accompanying notes
6 MYND CORPORATION (FORMERLY POLICY MANAGEMENT SYSTEMS CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements of Mynd Corporation (the "Company") have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the "SEC"). These consolidated financial statements include estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the amounts of revenues and expenses. Actual results may differ from those estimated. In the opinion of management, these statements include all adjustments necessary for a fair presentation of the results of all interim periods reported herein. All adjustments are of a normal recurring nature unless otherwise disclosed. Certain information and footnote disclosures prepared in accordance with generally accepted accounting principles either have been condensed or omitted pursuant to SEC rules and regulations. However, management believes that the disclosures made are adequate for a fair presentation of results of operations, financial position and cash flows. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's latest annual report on Form 10-K/A. BASIC AND DILUTED EARNINGS PER SHARE Basic and diluted earnings per share ("EPS") are calculated according to the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share". Since the inclusion of stock options would be anti-dilutive, the numerator and denominator are the same for the calculation of both basic and diluted EPS, for the three and nine months ended September 30, 2000. The average market price of the stock for the period was below the exercise price for the majority of options outstanding during the period. = Options to purchase 7,376,956 shares of common stock at a weighted average price of $26.30 per share were outstanding but not included in the computation of diluted EPS for the period ending September 30, 2000. OTHER MATTERS Certain prior period amounts have been reclassified to conform to current period presentation. 7 NOTE 2. ACQUISITIONS On May 31, 2000, the Company purchased DEKRU B.V., a Dutch subsidiary of the German based DEKRA Group ("DEKRU"), for approximately $1.1 million in cash plus additional consideration of up to $6.1 million contingent upon the future performance of DEKRU to be recorded as royalty expense as incurred. DEKRU owns a software product (KDX) for managing and adjusting automobile claims. The Company intends to market and further develop KDX primarily for the European market. On June 30, 1999, the Company purchased DORN Technology Group, Inc. ("DORN"), a risk and claims management company, for $33.2 million in cash plus additional consideration based upon the performance of DORN. Pursuant to an amendment to this agreement in the 2000 third quarter, this additional consideration was limited to $1.1 million and was recorded as compensation expense in 1999 and the first half of 2000. DORN owns the Riskmaster(R) claims management software and Quest healthcare facility software, and provides risk and claims management software and services mainly to the US self-insured market. The Company intends to grow DORN's business and further develop the Riskmaster and Quest systems to complement its existing claims products. On June 30, 1999, the Company purchased Financial Administrative Services, Inc.("FAS"), a provider of business process outsourcing ("BPO") for $13.0 million plus additional consideration of up to $12.0 million contingent on the future performance of FAS, to be capitalized as additional goodwill when paid until 2005. FAS uses the Company's PolicyLink system to support the rapid introduction of variable insurance products and annuities in a business process outsourcing environment. The Company intends to grow the business acquired. On March 31, 1999, the Company purchased Legalgard Partners, L.P. ("Legalgard"), a legal cost containment business for $23.2 million plus additional consideration of up to $4.3 million contingent upon the future performance of Legalgard, to be recorded as compensation expense as incurred until 2003. Legalgard provides legal cost containment services mainly to the US property and casualty insurance industry using the Counsel Partnership(TM) System, a proprietary software system. The Company intends to continue growing Legalgard's existing services business and developing the technology acquired. The acquisitions above have been recorded using the purchase method of accounting. Accordingly, the Consolidated Statement of Operations of the Company does not include the results of operations before the date of the acquisition. 8 NOTE 3. CONTINGENCIES In January 2000, Computer Sciences Corporation ("CSC") filed a complaint against the Company alleging that the Company and NeuronWorks, an entity retained by the Company in the development of Claims Outcome Advisor(TM) ("COA"), misappropriated CSC's trade secrets related to CSC's Colossus product and used such trade secrets in the development of the Company's COA product. The litigation was removed from Texas State court and is currently pending in the United States District Court for the Western District of Texas, Austin Division. CSC's complaint alleges unfair competition, product misappropriation, trade secret theft, tortious interference with existing and prospective contracts, aiding and abetting breach of fiduciary duty, and civil conspiracy. CSC's complaint seeks preliminary and permanent injunctive relief, damages, attorneys' fees and punitive damages, all in an unspecified amount. The Company has denied the allegations against it and asserted various affirmative defenses and counterclaims against CSC, including counterclaims for unfair trade practices, false representation, false promotion and commercial disparagement under the Lanham Act, business disparagement, injurious falsehood, defamation, and tortious interference with existing and prospective contractual and business relationships. On March 22, 2000, a hearing was held on CSC's request for preliminary injunctive relief to enjoin the Company from marketing and licensing COA. CSC's request for preliminary injunctive relief was denied. The case is anticipated to be set for trial in the 2001 first quarter. The Company believes CSC's remaining claims are without merit and is vigorously defending this matter and pursuing relief on the Company's claims. On May 22, 2000 an amended consolidated complaint was filed in the previously disclosed purported class action filed on behalf of purchasers of the Company's stock during the period October 22, 1998 and February 10, 2000. (See Item 1, Legal Proceedings, of Part II contained in the Company's report on Form 10-Q for the quarter ended March 31, 2000). The defendants have filed a motion to dismiss the complaint and intend to vigorously pursue a full defense of the action. Also on May 22, 2000, an amended complaint was filed in the previously disclosed purported class action brought by one of the Company's employees, suing allegedly on behalf of herself and all former or current participants in the Company's 401(k) Retirement Savings Plan ("Plan") during the period October 22, 1998 through February 10, 2000, against the Company, its Chairman and three members of the Administrative Committee of the Plan. The amended complaint alleges that the Plan's investment in the Company's stock violated Sections 502 (a) (2) and (3) of ERISA and constituted a breach of fiduciary duty given defendants' alleged knowledge that the Company's stock price was artificially inflated throughout the class period as a result of the same series of alleged materially false and misleading statements that form the basis of the securities class action described above. The court has entered an order providing for the coordination of proceedings with the securities class action. The defendants have filed a motion to dismiss the complaint and intend to vigorously pursue a full defense of this action. As previously disclosed, between March 31, 2000 and May 5, 2000 four purported class actions were filed against the Company and its directors in the Court of Common Pleas in Richland County, South Carolina. (See Item 1, Legal Proceedings, of Part II contained in the Company's report on Form 10-Q for the quarter ended March 31, 2000). These actions were consolidated into a single action and an amended consolidated complaint was filed on July 24, 2000. The amended consolidated complaint alleges that the defendants breached their fiduciary duties by failing to conduct a market check and agreeing to an unreasonable termination fee in the June 20, 2000 Agreement and Plan of Merger 9 between the Company and Computer Sciences Corporation (CSC transaction) and breached their duty of candor in failing to disclose material information concerning the CSC transaction. The plaintiffs seek preliminary and permanent injunctive relief to enjoin payment of the termination fee under the Agreement and Plan of Merger between Politic Acquisition Corporation and the Company which was terminated by the Company. Plaintiffs also seek to enjoin consummation of the CSC tender offer until additional disclosures are made, to strike the termination fee in the CSC transaction, and seek reasonable attorney fees and costs. The plaintiffs' request for a temporary injunction was denied on August 7, 2000 following a hearing on plaintiffs' request. Defendants have filed a motion to dismiss the amended complaint and intend to vigorously pursue a full defense of this action. In addition to the litigation described above, there are also various other litigation proceedings and claims arising in the ordinary course of business. The Company believes it has meritorious defenses and is vigorously defending these matters. Resolution of any of the above matters could have a material adverse effect on the results of operations and consolidated financial position of the Company in future periods. While the Company does not expect these matters to have a material adverse effect in future periods it is unable to predict the ultimate outcome or the potential financial impact of these matters. In a letter dated April 29, 1999, the Company was notified by the Internal Revenue Service ("IRS") of proposed adjustments to its 1994, 1995 and 1996 federal income tax returns. The Company strongly disagreed with the proposed adjustments and submitted a written protest to the IRS. If the IRS had been successful in its position, a charge to income of approximately $16.3 million would have resulted. On September 29, 2000 the Company completed its negotiations with the Appeals Division of the IRS regarding the proposed adjustments. The Company prevailed in its position with respect to several of the more material items and as a result of the negotiated settlement there will be no charge to income for the proposed adjustments. Because the resolution of all issues in the 1994, 1995 and 1996 federal income tax returns will result in a refund in excess of $1.0 million, approval of the settlement is required from the United States Congressional Joint Committee on Taxation, a committee that approves large refunds. The Company is now awaiting that approval. 10 NOTE 4. SEGMENT INFORMATION The Company's operating segments are the four revenue-producing components of the Company for which separate financial information is produced for internal decision making and planning purposes. The segments are as follows: 1. Property and casualty enterprise software and services (generally referred to as "property and casualty"). This segment provides software products, product support, professional services and outsourcing primarily to the US property and casualty insurance market. 2. Claims and risk management (generally referred to as "claims"). This segment provides software products, product support, professional services and outsourcing primarily to the claims management function of the US insurance industry and risk management, i.e. self-insured, marketplace. Prior to the 2000 first quarter, claims was included in the property and casualty segment. 3. Life and financial solutions enterprise software and services (generally referred to as "life and financial solutions"). This segment provides software products, product support, professional services and outsourcing primarily to the US life insurance and related financial services markets. 4. International. This segment provides software products, product support, professional services and outsourcing to the property and casualty and life insurance markets primarily in Europe, Asia, Australia and Canada. 11 Information about the Company's operations for the three and nine months ended September 30, 2000 and 1999 is as follows (in thousands):
Three Months Nine Months Ended September 30, Ended September 30, --------------------- ------------------- 2000 1999 2000 1999 --------- ---------- --------- --------- REVENUES FROM EXTERNAL CUSTOMERS Property and casualty. . . . . . $ 54,241 $ 66,298 $158,744 $207,445 Claims.. . . . . . . . . . . . . 7,122 7,734 20,504 17,357 Life and financial solutions . . 49,374 51,837 144,086 141,001 --------- ---------- --------- --------- Total US revenues. . . . . . . 110,737 125,869 323,334 365,803 International. . . . . . . . . . 29,509 42,919 105,328 136,806 --------- ---------- --------- --------- Total revenues . . . . . . . . $140,246 $ 168,788 $428,662 $502,609 ========= ========== ========= ========= INCOME (LOSS) FROM OPERATIONS Property and casualty. . . . . . $ 7,631 $ (66,836) $ 17,056 $(29,658) Claims.. . . . . . . . . . . . . (1,586) (250) (4,587) 5,352 Life and financial solutions . . 3,749 (1,527) 1,216 17,338 Corporate and US administrative. (11,869) (12,129) (59,116) (28,361) --------- ---------- --------- --------- Total US operating loss. . . . (2,075) (80,742) (45,431) (35,329) --------- ---------- --------- --------- International. . . . . . . . . . (5,736) (24,996) (13,900) (17,196) International administrative . . (1,583) (1,952) (5,278) (5,594) --------- ---------- --------- --------- Total international. . . . . . (7,319) (26,948) (19,178) (22,790) --------- ---------- --------- --------- Operating loss . . . . . . . . (9,394) (107,690) (64,609) (58,119) Equity in earnings of unconsolidated affiliates. . . 227 320 938 609 Minority interest. . . . . . . . 62 (14) 101 (94) Other income and expenses. . . . (8,700) (3,325) (16,102) (7,130) Tax benefit. . . . . . . . . . . (7,415) (40,261) (14,253) (23,249) --------- ---------- --------- --------- Net loss . . . . . . . . . . . $(10,390) $ (70,448) $(65,419) $(41,485) ========= ========== ========= =========
NOTE 5. SPECIAL CHARGES AND ACCOUNTING CHANGES The Company considers special charges to be unusual events or transactions related to continuing business activities. Accounting changes include changes in accounting principles and estimates that require a cumulative catch-up adjustment in accordance with Accounting Principles Board Opinion No. 20, "Accounting Changes". Third Quarter 2000: The Company's results for the 2000 third quarter include pre-tax net special charges of approximately $17.5 million of which $15.0 million have or will be paid in cash. Restructuring and other charges include $6.5 million of severance related to a reduction in force announced in the 2000 third quarter, and $2.2 million of expenses associated with responding to the Federal Trade Commission regarding the proposed merger with CSC and the CSC and shareholder lawsuits. Other costs and expenses includes a $3.7 million charge due to a single international customer's accounts receivable and accrued revenue balances as a result of the customer's deteriorating financial condition and corresponding inability to meet agreed payment schedules. 12 During the 2000 third quarter the Company sold the banking division's mortgage origination software business to a third party. The Company continues negotiating the sale of the remainder of the banking division's operations. Special charges include the banking division operating loss of $1.1 million on revenues of $3.0 million. Other costs and expenses include an additional $0.8 million loss on disposal of the banking division's mortgage loan origination software business assets. Depreciation and amortization of property, equipment and capitalized software costs includes $0.3 million of accelerated amortization of capitalized software development costs. In accordance with the Company's accounting policies and Statement of Financial Accounting Standards No. 86, these costs were determined in the 2000 third quarter to be unrecoverable. Selling, general and administrative expenses include approximately $0.2 million of brand expenses associated with changing the name of the Company (see Note 7, "Change of Company's Name"). Merger termination charges include $0.9 million of additional expenses resulting from the Company's termination of the merger agreement with a subsidiary of Welsh, Carson, Anderson & Stowe VIII, L.P. ("WCAS") (see Note 6, "Proposed Merger"). Interest expense and other charges includes $1.5 million of amortization of credit facilities fees paid in the 2000 first quarter to amend the Company's existing credit facilities and $0.5 million of accrued interest expense on a note payable to CSC who advanced the Company the funds necessary to pay the termination fee which arose from the terminated merger agreement with WCAS in the 2000 second quarter. First nine months of 2000: The Company's results for the first nine months of 2000 include pre-tax net special charges and accounting changes of approximately $71.8 million of which $57.8 million have or will be paid in cash. Merger termination charges of $25.3 million represent fees and expenses resulting from the Company's termination of the merger agreement with WCAS (see Note 6, "Proposed Merger"). Restructuring and other charges include $15.0 million of largely severance related to reductions in force announced during the period, and $9.5 million in legal fees and expenses related to the resolution of a dispute with a customer, responding to the Federal Trade Commission regarding the proposed merger with CSC, and to the shareholder and CSC litigation. During the 2000 second quarter, management committed to a plan to restructure the operations of the United Kingdom ("UK") division of its international segment. The plan, among other things, entailed reductions in staff and space, and the indefinite suspension of development and decreased marketing efforts related to a software product which resulted in $7.3 million of accelerated amortization to write-off this product. 13 During the 2000 third quarter the Company sold the banking division's mortgage origination software business to a third party. The Company continues negotiating the sale of the remainder of the banking division's operations. Special charges include the banking division operating loss of $9.5 million on revenues of $8.7 million. In addition, $1.0 million of accelerated amortization was charged to write-off a related software product, and other costs and expenses includes the recovery of banking division accounts receivable of $1.3 million previously reserved as a special charge in the 1999 fourth quarter and a $0.8 million loss on disposal of the banking division's mortgage loan origination software business assets. The net pre-tax impact of these banking division items is $10.0 million. The Company recognizes certain revenue under the percentage of completion method of accounting ("POC") in accordance with Statement of Position 81-1. During the 2000 second quarter, management increased the estimated profit margin on a significant contract accounted for under POC which resulted in a cumulative adjustment of $1.5 million of additional professional services & ITO ("Information Technology Outsourcing") revenue partially offsetting special charges. Other costs and expenses includes a $3.7 million charge due to a single international customer's accounts receivable and accrued revenue balances as a result of the customer's deteriorating financial condition and corresponding inability to meet agreed payment schedules. Selling, general and administrative expenses include approximately $2.3 million of brand expenses associated with changing the name of the Company (see Note 7, "Change of Company's Name"). The Company recognizes amortization expense related to software products on the revenue basis if that is faster than the straight-line method. In addition to the above mentioned software write-offs in the U.K. and banking divisions, revenue based amortization resulted in approximately $1.3 million more amortization expense in the first nine months of 2000 than would have been recognized under the straight-line method. Investment income includes special gains of $5.3 million resulting from the sale of the Company's minority interest in several companies. Interest expense and other charges includes $3.6 million of amortization of credit facilities fees paid in the 2000 first quarter to amend the Company's existing credit facilities and $0.5 million of accrued interest expense on a note payable to CSC who advanced the Company the funds necessary to pay the termination fee which arose form the terminated merger agreement with WCAS in the 2000 second quarter. Third Quarter 1999: The Company's operating results for the 1999 third quarter include $126.7 million in special charges of which $100.4 million are non-cash. These non-cash charges result from a revaluation of capitalized software costs in light of an increasingly rapid pace of change in technology, changes in market forecasts, and the write-down of certain intangibles largely related to past international acquisitions. Cash charges of $26.5 million resulted from restructuring charges incurred as the Company eliminated costs through reductions in force and space requirements, and charges incurred in connection with the settlement of the Liberty Life litigation and resolution of disputes with customers. Depreciation and amortization of property, equipment and capitalized software costs includes approximately $94.3 million of accelerated amortization of capitalized software development costs. In accordance with the Company's accounting policies and Statement of Financial Accounting Standards No. 86, these costs were determined in the 1999 third quarter to be unrecoverable. 14 Amortization of goodwill and other intangibles includes approximately $6.1 million of impairment charges related primarily to past international acquisitions. These impairment charges were determined in the 1999 third quarter in accordance with the Company's accounting policies and Statement of Financial Accounting Standards No. 121. Restructuring and other charges includes approximately $12.6 million of cash charges paid or to be paid as a result of initiatives taken by the Company in the 1999 third quarter to eliminate costs through worldwide reductions in force and space requirements. The remaining $9.6 million of cash charges relate to the settlement of the Liberty Life litigation. Other costs and expenses include approximately $3.7 million of costs to resolve disputes with customers. Employee compensation and benefits includes approximately $0.6 million of expatriate taxes. The 1999 third quarter special charges are partially offset by the banking division's operating income of $0.2 million on revenues of $5.8 million. During the 2000 third quarter the Company sold the banking division's mortgage origination software business to a third party. The Company continues negotiating the sale of the remainder of the banking division's operations. First nine months of 1999: Special charges for the first nine months of 1999 include the third quarter 1999 special charges mentioned above and banking division operating income of $0.9 million on revenues of $15.1 million. NOTE 6. PROPOSED MERGER On June 20, 2000, the Company announced that it and CSC entered into an Agreement and Plan of Merger which, among other things, provided for a CSC tender offer to acquire the Company's outstanding shares at a purchase price of $16 per share in cash. On June 28, 2000, the Company filed its Solicitation/Recommendation Statement on Schedule 14D-9 related to CSC's tender offer. As a result of receiving a second request for information from the Federal Trade Commission concerning the proposed merger, CSC has extended the tender offer until November 24, 2000. As a result of entering the Agreement and Plan of Merger with CSC, the Company was required to pay a $19.0 million fee and to pay up to $5.0 million in expenses for terminating its previously proposed merger with WCAS. The cash required to pay this fee was loaned to the Company by CSC. NOTE 7. CHANGE OF COMPANY'S NAME Following an earlier announcement of plans to change the Company's name, the Company began doing business as Mynd Corporation ("Mynd") on May 1, 2000. The Company's name was officially changed by filing an amendment in the Company's Articles of Incorporation on September 27, 2000, following approval of the proposed name change by a vote of the shareholders at the annual shareholder's meeting also held on September 27, 2000. 15 MYND CORPORATION (FORMERLY POLICY MANAGEMENT SYSTEMS CORPORATION) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto contained in Part I of this report on Form 10-Q and with the Company's Annual Report on Form 10-K/A for the year ended December 31, 1999. RESULTS OF OPERATIONS Set forth below are certain operating items expressed as a percentage of revenues and the percent increase (decrease) for those items between the periods presented:
2000 vs. 1999 Percent Percentage of Revenues Increase (Decrease) ---------------------- ------------ Three Nine Three Nine Months Ended Months Ended September 30, September 30, Months Months -------------- -------------- Ended Ended 2000 1999 2000 1999 September 30, ----- ------ ------- ----- ------------ Revenues Licensing . . . . . . . . . . . . . 20.1% 22.2% 18.8% 23.1% (25)% (30)% Services. . . . . . . . . . . . . . 79.9 77.8 81.2 76.9 (15) (10) ------ ------- ------- ------ 100.0 100.0 100.0 100.0 (17) (15) ------ ------- ------- ------ Operating expenses Cost of revenues Employee compensation and benefits 49.1 46.6 52.1 45.5 (12) (2) Computer & communication expenses. 9.7 7.5 9.6 7.2 8 13 Depreciation & amortization of property, equipment & capitalized software costs. . . . 10.2 64.3 12.0 28.2 (87) (64) Other costs & expenses . . . . . . 11.5 9.0 8.9 6.4 6 19 Selling, general & administrative expenses . . . . . 16.8 17.3 18.3 16.6 (19) (6) Amortization of goodwill and other intangibles . . . . . . . . 2.6 5.9 2.5 3.3 (64) (35) Restructuring & other charges . . . 6.1 13.2 5.8 4.4 (61) 11 Merger termination charges. . . . . 0.7 - 5.9 - - - ------ ------- ------- ------ 106.7 163.8 115.1 111.6 (46) (12) ------ ------- ------- ------ Operating loss . . . . . . . . . . . (6.7) (63.8) (15.1) (11.6) (91) 11 Equity in earnings of unconsolidated affiliates. . . . . . . . . . . . 0.2 0.2 0.2 0.1 (29) 54 Investment income. . . . . . . . . . 0.2 0.1 1.5 0.1 29 847 Interest expense and other charges . (6.4) (2.1) (5.2) (1.5) 153 188 ------ ------- ------- ------ Loss before tax benefit. . . . . . . (12.7) (65.6) (18.6) (12.9) (84) 23 Tax benefit. . . . . . . . . . . . . (5.3) (23.9) (3.3) (4.6) (82) (39) ------ ------- ------- ------ Net loss . . . . . . . . . . . . . . (7.4)% (41.7)% (15.3)% (8.3)% (85)% 58% ====== ======= ======= ======
16 THREE MONTH COMPARISON REVENUES Licensing --------- In licensing the Company's products, customers generally obligate themselves to a non-refundable initial license charge and a monthly license fee payable over a specified period of time, which is usually six years. The monthly license charge entitles the customer, over the contract period, to use the licensed product and to receive product support and enhancements.
Three Months Ended September 30, ---------------------- 2000 1999 Change ----- ----- ------ (Dollars in millions) Initial charges . . . . . . . $11.4 $19.2 (41)% Monthly charges . . . . . . . 16.7 18.1 (8) ------ ------ 28.1 $37.3 (25)% ====== ====== Percentage of total revenues. 20.1% 22.2% ------ ------
Initial licensing Initial license revenues decreased $7.8 million for the 2000 third quarter compared with the 1999 third quarter, with the following decreases by business segment: property and casualty down 11% ($0.8 million); claims down 13% ($0.4 million); life and financial solutions down 69% ($3.4 million); and international down 78% ($3.2 million). Property and casualty includes recognition of $4.3 million of initial license revenue related to a license agreement executed in the 1999 fourth quarter. The Company believes that during the 2000 third quarter, uncertainty concerning the Company's future ownership, including the proposed merger with CSC, adversely affected customers' decisions to license software from the Company. Management anticipates that the adverse effect on customers' decisions will continue until the uncertainty is resolved. Initial license charges for the third quarter of 2000 included right-to-use licenses to existing customers of $0.2 million. This compares to $2.0 million in right-to-use licenses for the third quarter of 1999. Right-to-use licenses represent the acquisition by certain customers of the right-to-use component of their remaining monthly license charge obligation, if any, plus the acquisition of a perpetual right-to-use the product thereafter. Since these types of licenses represent an acceleration of future revenues, they reduce future monthly license charges. The Company entered two non-exclusive remarketing agreements in the 1999 second quarter providing two of the Company's nationally recognized vendors the right to re-license a product to customers. The Company also renegotiated with one of these vendors an extension to its long-term license agreement for operating software used in the Company's data center. These agreements were affected by the Company's adoption of Staff Accounting Bulletin 101 as of 17 December 31, 1999. Consequently, the $3.5 million of initial license revenue was adjusted in the 1999 fourth quarter and is being recognized ratably over the terms of the respective agreements. Initial license revenue includes $0.3 million of this revenue in the 2000 third quarter. Set forth below is a comparison of initial license revenue by segment for the three months ended September 30, 2000 and 1999:
Three Months Monthly licensing Ended September 30, --------------------- 2000 1999 Change ----- ----- ------ (Dollars in millions) Property and casualty . . . . . $ 5.9 $ 7.0 (16)% Claims. . . . . . . . . . . . . 1.3 1.2 8 Life and financial solutions. . 4.9 5.0 (2) International . . . . . . . . . 4.6 4.9 (6) ------ ------ $ 16.7 $18.1 (8)% ====== ====== Percentage of total revenues. 11.9% 10.7% ------ ------
Services --------- The Company's services revenue consists primarily of professional Services & Information Technology Outsourcing ("ITO") and Business Process Outsourcing ("BPO"). Services revenue is derived from professional support services, which include implementation and integration assistance, consulting and education services and outsourcing services. 18
Three Months Ended September ----------------------- Services 2000 1999 Change ------- ------ ------ (Dollars in millions) Professional services & ITO . . $ 86.5 $111.3 (22)% BPO . . . . . . . . . . . . . . 25.3 19.5 30 Other . . . . . . . . . . . . . 0.3 0.6 (50) ------- ------- $112.1 $131.4 (15)% ======= ======= Percentage of total revenues. 79.9% 77.8% ------- -------
Professional services & ITO Professional services & ITO revenues decreased $24.8 million for the 2000 third quarter compared with the 1999 third quarter, with the following decreases by business segment: property and casualty down 28% ($10.9 million); claims down 15% ($0.5 million); life and financial solutions down 7% ($2.5 million); and international down 33% ($10.9 million). Weak initial licensing activity in 1999 and the first nine months of 2000 negatively impacted professional services & ITO revenue for all segments. In addition, life and financial solutions was substantially affected by the decline in its Banking division operations while property and casualty was affected by the migration of ITO customers from mainframe Series II processing to AS/400 Point processing. Set forth below is a comparison of professional services & ITO revenue by segment for the three months ended September 30, 2000 and 1999:
Three Months Professional services & ITO Ended September 30, ---------------------- 2000 1999 Change ----- ------ ------ (Dollars in millions) Property and casualty. . . . $28.7 $ 39.6 (28)% Claims . . . . . . . . . . . 2.9 3.4 (15) Life and financial solutions 32.3 34.8 (7) International. . . . . . . . 22.6 33.5 (33) ------ ------- $86.5 $111.3 (22)% ====== ======= Percentage of total revenues 61.7% 65.9% ------ -------
BPO BPO revenues increased $5.8 million for the 2000 third quarter compared with the 1999 third quarter, with the following increases by business segment: property and casualty up 10% ($1.2 million) due largely to the addition of a significant BPO customer in the 2000 third quarter; life and financial solutions up 49% ($3.5 million) due primarily to organic growth; and international up 550% ($1.1 million) due to increased processing in South Africa. The claims segment has no BPO operations. 19 Set forth below is a comparison of BPO revenue by segment for the three months ended September 30, 2000 and 1999:
Three Months BPO Ended September 30, --------------------- 2000 1999 Change ----- ----- ------ (Dollars in millions) Property and casualty. . . . $13.3 $12.1 10% Claims . . . . . . . . . . . - - - Life and financial solutions 10.7 7.2 49 International. . . . . . . . 1.3 0.2 550 ------ ------ $25.3 $19.5 30% ====== ====== Percentage of total revenues 18.0% 11.6% ------ ------
OPERATING EXPENSES COST OF REVENUES Employee compensation and benefits decreased 12% for the 2000 third quarter compared with the 1999 third quarter due to the benefit of reductions in force taken in 1999 and 2000. Domestic employee compensation and benefits decreased 9% ($5.2 million) in the 2000 third quarter compared with the 1999 third quarter. International employee compensation and benefits decreased 22% ($4.6 million) in the 2000 third quarter compared with the 1999 third quarter. Computer and communications expenses increased 8% for the 2000 third quarter compared with the 1999 third quarter due to increases in processing volumes and data center operating software license fees. Depreciation and amortization of property, equipment and capitalized software costs decreased 87% for the 2000 third quarter compared with the 1999 third quarter due to the write-offs or write-downs of certain software in the 1999 third quarter (see Note 5 of Notes to Consolidated Financial Statements). Excluding these 1999 charges, depreciation and amortization increased 4% reflecting releases of the Company's products during the last twelve months related primarily to 1999 acquisitions. Other operating costs and expenses increased 6% for the third quarter of 2000 compared with the 1999 third quarter due primarily to a decrease in the amount of development costs capitalized and an increase in the amounts charged for uncollectible accounts. These were largely offset by the benefit of space reductions in prior quarters and lower consulting and travel expenses in the 2000 third quarter. Excluding special charges and change in accounting estimate, other operating costs and expenses decreased 13%. 20 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased 19% for the 2000 third quarter compared with the 1999 third quarter due in part to the reduction in force and decreased costs associated with the Company's lower revenues offset by brand expenses associated with changing the Company's name. As a percentage of revenues, selling, general and administrative expenses decreased from 17.3% in the 1999 third quarter to 16.8% in the 2000 third quarter. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES Amortization of goodwill and other intangibles decreased 64% for the 2000 third quarter compared with the 1999 third quarter due to $6.1 million of 1999 third quarter impairment charges related primarily to past international acquisitions (see Note 5 of Notes to Consolidated Financial Statements). Excluding these 1999 charges, amortization of goodwill and other intangibles decreased 8%. RESTRUCTURING AND OTHER CHARGES Restructuring and other charges includes approximately $6.5 million of cash charges paid or to be paid as a result of initiatives taken by the Company in the 2000 third quarter for a world-wide reduction in force of approximately 6% of its full time staff as well as $9.5 million for the CSC and shareholder lawsuits, settlement of a dispute with a customer and expenses associated with responding to the Federal Trade Commission regarding the proposed merger with CSC. OPERATING LOSS The 2000 third quarter operating loss of $9.4 million includes net special charges of approximately $15.5 million compared to the 1999 third quarter operating loss of $107.7 million which includes net special charges of $126.7 million (see Note 5 of Notes Financial to Consolidated Statements for special charges). Before special charges, the 2000 third quarter operating income decreased 67% compared with the 1999 third quarter. 21 Set forth below is a comparison of operating income (loss) by segment for the three months ended September 30, 2000 and 1999:
Three Months OPERATING INCOME (LOSS) Ended September 30, ------------------------ 2000 1999 Change ------- ------- ------ (Dollars in millions) Property and casualty. . . . $ 7.6 (66.8) 111% Claims . . . . . . . . . . . (1.6) (0.3) (433) Life and financial solutions 3.8 (1.5) 353 Corporate. . . . . . . . . . (11.9) (12.1) 2 International. . . . . . . . (7.3) (27.0) 73 ------- -------- $ (9.4) $(107.7) 91% ======= ========
Property and casualty segment operating income increased $74.4 million or 111% due primarily to the write-offs or write-downs of software in the 1999 third quarter and other special charges. Before special charges and accounting changes, operating income was $10.8 million and $20.5 million for the three months ended September 30, 2000 and 1999, respectively. The decrease in operating income is due primarily to a $11.0 million decline in professional services & ITO revenue. Claims segment operating loss increased $1.3 million to a loss of $1.6 million in the 2000 third quarter due to lower licensing and professional services & ITO revenue and higher operating expenses. Before special charges, operating loss was $0.8 million and $0.3 million for the three months ended September 30, 2000 and 1999, respectively. Life and financial solutions segment operating income increased $5.3 million or 353% due primarily to 1999 third quarter charges relating to a litigation settlement partially offset by 2000 third quarter Banking division losses. Before special charges, operating income was $6.4 million and $7.9 million for the three months ended September 30, 2000 and 1999, respectively. Notwithstanding the Company's reduction in force, the related decrease in expenses lagged behind the decline in revenues resulting in lower margins in its property and casualty and life segments. International segment operating loss decreased $19.7 million or 73% primarily due to the write-off and write-down of software and intangibles in the 1999 third quarter. Before special charges and accounting changes, operating loss was $2.8 million and $0.7 million for the three months ended September 30, 2000 and 1999, respectively. A significant portion of both the Company's revenues and operating income is derived from initial licensing agreements received as part of the Company's software licensing activities. Because a substantial portion of initial licensing revenues are recorded at the time new systems are licensed, there can be significant fluctuations from quarter to quarter in revenues and operating income derived from licensing activities. This is attributable principally to the timing of customers' decisions to enter into license agreements with the Company, which the Company is unable to control. 22 Set forth below is a comparison of initial license revenues for the last eight quarters expressed as a percentage of total revenues of each of the periods presented:
2000 1999 1998 -------------------- ----------------------------- ------ 3rd 2nd 1st 4th 3rd 2nd 1st 4th ----- ------ ----- ----- ----- ------ ------- ------ Dollars in Millions) Initial license revenues. $11.4 $9.5 $9.1 $8.7 $19.2 $26.8 $17.5 $27.4 % of total revenues . . . 8.1% 6.8% 6.1% 6.1% 11.4% 15.4% 11.0% 16.0%
The increasing rate of change in the insurance and banking industries coupled with the rapid evolution of eCommerce technology and the volatility of initial license revenues, as illustrated by the above table, is leading the Company to consider new business models that place less emphasis on initial license revenue and place more emphasis on transaction based revenue. The Company expects this transition to occur gradually over the next several years and will likely affect the amount and timing of revenue recognized in the Company's financial statements. OTHER INCOME AND EXPENSES Investment income increased 29% ($0.1 million) in the 2000 third quarter compared with the 1999 third quarter. Interest expense and other charges is comprised primarily of interest expense on borrowings under the Company's credit facilities which increased $3.3 million for the 2000 third quarter compared with the 1999 third quarter, principally due to higher interest rates and higher levels of borrowed funds under the Company's credit agreements. The nominal interest rate applicable to borrowings under the Company's credit facilities during the third quarter of 2000 ranged from 9.4% to 10.5% compared to a range of 5.4% to 5.9% in the 1999 third quarter. Interest expense and other charges includes $1.5 million of amortization expense for credit facilities fees paid in the 2000 first quarter to amend the Company's credit agreements and $0.5 million of accrued interest expense related to the $19.0 million note payable to CSC. INCOME TAXES The effective income tax rate (income taxes expressed as a percentage of pre-tax income) was 41.6% and 36.4% for the third quarters of 2000 and 1999, respectively. The effective rate for the three months ended September 30, 2000 is not comparable to the three months ended September 30, 1999 due primarily to certain merger related expenses and the establishment of a valuation allowance for certain deferred tax assets. The valuation allowance was established due to the uncertain realization of those assets in light of the Company's operating performance in the 2000 third quarter. 23 NINE MONTH COMPARISON REVENUES
Nine Months Ended September 30, ---------------------- Licensing 2000 1999 Change ----- ----- ------ (Dollars in millions) Initial charges. . . . . . . $30.0 $ 63.5 (53)% Monthly charges. . . . . . . 50.6 52.3 (3) ------ ------- $80.6 $115.8 (30)% ====== ======= Percentage of total revenues 18.8% 23.1% ------ -------
Initial licensing Initial license revenues decreased $33.5 million for the first nine months of 2000 compared with the first nine months of 1999, with the following decreases by business segment: property and casualty down 67% ($16.2 million) due primarily to right-to-use agreements included in the first nine months of 1999; claims down 28% ($2.9 million) due primarily to remarketing agreements included in the first nine months of 1999; life and financial solutions down 51% ($7.1 million) with minimal Banking division initial licenses in 2000 compared with strong initial licenses in the first nine months of 1999; and international down 48% ($7.3 million) reflecting weak 2000 initial licensing in Europe. Property and casualty includes recognition of $4.4 million of initial license revenue for the first nine months of 2000 related to a license agreement executed in the 1999 fourth quarter. The Company believes that several factors negatively affected initial licensing activity in 2000. Lingering customer Y2K concerns and uncertainty surrounding the Company's credit agreements and the delayed filing of the Company's 1999 annual report affected initial licensing during the 2000 first quarter. The WCAS merger agreement and its subsequent termination upon entering into the merger agreement with CSC affected the 2000 second quarter. Continuing uncertainty concerning the Company's ownership effected the 2000 third quarter as the Company and CSC have responded to an extended review by the Federal Trade Commission. Initial license charges for the first nine months of 2000 include right-to-use licenses to existing customers of $0.7 million compared with $13.7 million for the first nine months of 1999. Right-to-use licenses represent the acquisition by certain customers of the right-to-use component of their remaining monthly license charge obligation, if any, plus the acquisition of a perpetual right-to-use the product thereafter. Since these types of licenses represent an acceleration of future revenues, they reduce future monthly license charges. The Company expects the occurrence of right-to-use licenses to be minimal in the future. Initial license charges for the first nine months of 1999 include the first license of the Company's new workplace injury claims management tool, Claims Outcome Advisor, which was licensed in conjunction with the purchase of Legalgard and $2.0 million of licenses to a life insurance company that was the 24 former owners of FAS which the Company acquired at the end of the 1999 second quarter (see Note 2 of Notes to Consolidated Financial Statements regarding Legalgard and FAS). Two remarketing agreements for COA, totaling $3.5 million, are included in initial licensing revenues for the first nine months of 1999. These non-exclusive agreements provide two of the Company's nationally recognized vendors the right to re-license COA to the self-insured market. The Company also renegotiated with one of these vendors an extension to its long-term license agreement for operating software used in the Company's data center. These agreements were affected by the Company's adoption of Staff Accounting Bulletin 101 as of December 31, 1999. Consequently, the $3.5 million of initial license revenue was adjusted in the 1999 fourth quarter and is being recognized ratably over the terms of the respective agreements. Initial license revenue includes $1.9 million of this revenue in the first nine months of 2000. The increasing rate of change in the insurance and banking industries coupled with the rapid evolution of eCommerce technology and the volatility of initial license revenues is leading the Company to consider new business models that place less emphasis on initial license revenue and place more emphasis on transaction based revenue. The Company expects this transition to occur gradually over the next several years and will likely affect the amount and timing of revenue recognized in the Company's financial statements. Set forth below is a comparison of initial license revenue by segment for the nine months ended September 30, 2000 and 1999:
Nine Months Initial licensing Ended September 30, ---------------------- 2000 1999 Change ------ ------ ------ (Dollars in millions) Property and casualty. . . . $ 8.0 $24.2 (67)% Claims . . . . . . . . . . . 7.3 10.2 (28) Life and financial solutions 6.7 13.8 (51) International. . . . . . . . 8.0 15.3 (48) ------ ------ $30.0 $63.5 (53)% ====== ====== Percentage of total revenues 7.0% 12.6% ------ ------
Monthly licensing Monthly license charges decreased $1.7 million for the first nine months of 2000 compared with the first nine months of 1999 with the following increases or decreases by business segment: property and casualty down 17% ($3.6 million) due to weak 1999 and 2000 first nine months licensing and the effect of right-to-use licenses; claims up 231% ($3.0 million); life and financial solutions was relatively unchanged due to a decline in the Banking division being offset by increases in other areas; and international down 6% ($0.9 million). 25 Set forth below is a comparison of monthly licensing revenue by segment for the nine months ended September 30, 2000 and 1999:
Nine Months Monthly licensing Ended September 30, ---------------------- 2000 1999 Change ----- ----- ------ (Dollars in millions) Property and casualty. . . . $18.2 $21.8 (17)% Claims . . . . . . . . . . . 4.3 1.3 231 Life and financial solutions 14.7 14.9 (1) International. . . . . . . . 13.4 14.3 (6) ------ ------ $50.6 $52.3 (3)% ====== ====== Percentage of total revenues 11.8% 10.4% ------ ------
Nine Months Ended September 30, ------------------------ Services 2000 1999 Change ------ ------ ------ (Dollars in millions) Professional services & ITO. $271.3 $335.2 (19)% BPO. . . . . . . . . . . . . 73.4 48.8 50 Other. . . . . . . . . . . . 3.4 2.8 21 ------- ------- $348.1 $386.8 (10)% ======= ======= Percentage of total revenues 81.2% 76.9% ------- -------
Professional services & ITO Professional services & ITO revenues decreased $63.9 million for the first nine months of 2000 compared with the first nine months of 1999, with the following decreases or increase by business segment: property and casualty down 25% ($31.2 million); claims up 53% ($3.1 million); life and financial solutions down 7% ($7.2 million) due in part to a decline in the Banking division; and international down 27% ($28.6 million). The decreases are principally due to weak initial licensing activity during 1999 and the first six months of 2000. Property and casualty was adversely affected by the migration of ITO customers from mainframe Series II processing to AS400 Point processing. Also, international was adversely affected by the loss of a significant ITO customer in the 1999 third quarter. In the first nine months of 2000, the international segment's revenue includes a $1.5 million cumulative catch-up adjustment based on a change in accounting estimate associated with a significant contract accounted for under POC. The property and casualty segment's 1999 nine month revenues include $1.6 million for professional services billed and collected in connection with the settlement of a dispute with a customer who has terminated its relationship with the Company. Amounts paid by the Company in connection with the resolution of this dispute were covered by insurance and existing legal reserves and had no impact on the Company's operating results. 26 Set forth below is a comparison of professional services & ITO revenue by segment for the nine months ended September 30, 2000 and 1999:
Nine months Professional services & ITO Ended September 30, ------------------------ 2000 1999 Change ------- ------ ------ (Dollars in millions) Property and casualty. . . . $ 92.8 $124.0 (25)% Claims . . . . . . . . . . . 8.9 5.8 53 Life and financial solutions 91.9 99.1 (7) International. . . . . . . . 77.7 106.3 (27) ------- ------- $271.3 $335.2 (19)% ======= ======= Percentage of total revenues 63.3% 66.7% ------- -------
BPO BPO revenues increased $24.6 million for the first nine months of 2000 compared with the first nine months of 1999, with the following increases by business segment: property and casualty up 7% ($2.4 million); life insurance and financial solutions up 133% ($17.5 million) due primarily to organic growth; and international up $4.7 million due to increased processing in Europe and South Africa. The claims segment has no BPO operations. Set forth below is a comparison of BPO revenue by segment for the nine months ended September 30, 2000 and 1999:
Nine months BPO Ended September 30, --------------------- 2000 1999 Change ------- ------ ------ (Dollars in millions) Property and casualty. . . . $ 37.4 $35.0 7% Claims . . . . . . . . . . . - - - Life and financial solutions 30.7 13.2 133 International. . . . . . . . 5.3 0.6 783 -------- ------ $ 73.4 $48.8 50% ======== ====== Percentage of total revenues 17.1% 9.7% -------- ------
OPERATING EXPENSES COST OF REVENUES Employee compensation and benefits decreased 2% for the first nine months of 2000 compared with the first nine months of 1999 due primarily to reductions in force in 1999 and 2000 being partially offset by the increase in benefit expense due to the acceleration of health claims paid as a result of the reduction in force. Domestic employee compensation and benefits in the first nine months of 2000 increased 2% ($4.0 million) compared with the first nine months of 1999. International employee compensation and benefits decreased 14% ($9.3 million) for first nine months of 2000 compared with the first nine months of 1999. 27 Computer and communications expenses increased 13% for the first nine months of 2000 compared with the first nine months of 1999 due to an increase in processing volumes and data center operating software license fees. Depreciation and amortization of property, equipment and capitalized software costs decreased 64% for the first nine months of 2000 compared with the first nine months of 1999 due to the write-off or write-down of certain software in the 1999 third quarter being partially offset by 2000 first and second quarter software write-offs or write-downs (see Note 5 of Notes to Consolidated Financial Statements). Excluding these charges, depreciation and amortization decreased 9% reflecting the benefit of the above mentioned special charges. Other operating costs and expenses increased 19% for the first nine months of 2000 compared with the first nine months of 1999 due to a decrease in the amount of development costs capitalized and an increase in the amounts charged for uncollectible accounts. These were partially offset by the benefit of space reductions in prior quarters and lower consulting and travel expenses in the 2000 third quarter. Excluding special charges and change in accounting estimate, other operating costs and expenses decreased 3%. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased 6% for the first nine months of 2000 compared with the first nine months of 1999 due to reductions in force and decreased costs associated with the Company's lower revenues partially offset by $2.3 million of brand expenses incurred in the first nine months of 2000 associated with changing the Company's name. As a percentage of revenues, selling, general and administrative expenses increased from 16.6% in the first nine months of 1999 to 18.3% in the first nine months of 2000. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES Amortization of goodwill and other intangibles decreased 35% for the first nine months of 2000 compared with the first nine months of 1999, principally due to the benefit of 1999 third quarter impairment charges related primarily to past international acquisitions (see Note 5 of Notes to Consolidated Financial Statements). Before special charges, amortization of goodwill and other intangibles increased 3%. RESTRUCTURING AND OTHER CHARGES Restructuring and other charges include approximately $15.2 million of cash charges paid or to be paid as a result of initiatives taken by the Company in the first nine months of 2000 for a worldwide reduction in force of approximately 700 employees and $9.5 million for the CSC and shareholder lawsuits, settlement of a dispute with a customer and expenses associated with responding to the Federal Trade Commission regarding the proposed merger with CSC. 28 MERGER TERMINATION CHARGES Merger termination charges of $25.3 million were a result of the Company's termination of the WCAS merger (see Note 6 of Notes to Consolidated Financial Statements). OPERATING (LOSS) INCOME The first nine months of 2000 results produced an operating loss of $64.6 million, which includes net special charges and accounting changes of $73.0 million. The first nine months of 1999 results produced an operating loss of $58.1 million, which includes net special charges and accounting changes of $126.0 million. See Note 5 of the Notes to the Consolidated Financial Statements for further explanation of these special charges and accounting changes. Before these special charges and accounting changes, the first nine months of 2000 resulted in operating income of $8.4 million compared with operating income of $67.9 million in the first nine months of 1999. Set forth below is a comparison of operating income (loss) by segment for the periods ending September 30, 2000 and 1999:
Nine Months OPERATING INCOME (LOSS) Ended September 30, ----------------------- 2000 1999 Change ------ ------ ------ (Dollars in millions) Property and casualty. . . . $ 17.1 $(29.7) 158% Claims . . . . . . . . . . . (4.6) 5.4 (185) Life and financial solutions 1.2 17.3 (93) Corporate. . . . . . . . . . (59.1) (28.4) (108) International. . . . . . . . (19.2) (22.7) 15 ------- ------- $(64.6) $(58.1) (11)% ======= =======
Property and casualty segment operating income increased $46.8 million or 158% primarily due to the write-off or write-down of software in the 1999 third quarter and other charges being partially offset by special charges and accounting changes in the first nine months of 2000. Before special charges and accounting changes, operating income was $24.3 million and $57.6 million for the nine months ended September 30, 2000 and 1999, respectively. The decrease in operating income was principally attributable to a $19.9 million decrease in licensing revenue and a $31.3 million decrease in professional services & ITO revenue. Claims segment operating income decreased $10.0 million to a loss of $4.6 million principally due to a $2.9 million decrease in initial license charges and operating costs growing faster than revenues. Before special charges, operating (loss) income was $(3.7) million and $5.4 million for the nine months ended September 30, 2000 and 1999, respectively. Life and financial solutions segment operating income decreased $16.1 million or 93% principally due to Banking division losses of $9.5 million and a decrease in initial license charges of $7.1 million. Before special charges, operating income was $17.1 million and $26.0 million for the nine months ended September 30, 2000 and 1999, respectively. 29 International segment operating loss decreased $3.5 million to a loss of $19.2 million primarily due to the write-off or write-down of software and intangibles in the 1999 third quarter being partially offset by special charges and accounting changes for the first nine months of 2000. Before special charges and accounting changes, operating (loss) income was $(5.2) million and $3.5 million for the nine months ended September 30, 2000 and 1999, respectively. Notwithstanding the Company's reduction in force, the related decrease in expenses lagged behind the decline in revenues resulting in lower margins in its property and casualty, life and international segments. A significant portion of both the Company's revenues and operating income is derived from initial licensing agreements received as part of the Company's software licensing activities. Because a substantial portion of initial licensing revenues are recorded at the time new systems are licensed, there can be significant fluctuations from quarter to quarter in revenues and operating income derived from licensing activities. This is attributable principally to the timing of customers' decisions to enter into license agreements with the Company, which the Company is unable to control. The increasing rate of change in the insurance and banking industries coupled with the rapid evolution of eCommerce technology and the volatility of initial license revenues is leading the Company to consider new business models that place less emphasis on initial license revenue and place more emphasis on transaction based revenue. The Company expects this transition to occur gradually over the next several years and will likely affect the amount and timing of revenue recognized in the Company's financial statements. OTHER INCOME AND EXPENSES Investment income includes $5.3 million of gain on sale of investments in the first nine months of 2000. Interest expense and other charges is comprised primarily of interest expense on borrowings under the Company's credit facilities which increased $10.0 million for the first nine months of 2000 compared with the first nine months of 1999, principally due to higher interest rates on higher levels of borrowed funds under the Company's credit agreements. The nominal interest rate applicable to borrowings under the Company's credit facility during the first nine months of 2000 ranged from 7.4% to 10.5% compared to a range of 5.2% to 5.9% for the same period in 1999. Interest expense and other charges includes $3.5 million of amortization expense for credit facilities fees paid in the 2000 first quarter to amend the Company's credit agreements and $0.5 million of accrued interest expense related to the $19.0 million note payable to CSC. 30 INCOME TAXES The effective income tax rate (income taxes expressed as a percentage of pre-tax income) was 17.9% and 35.9% for the first nine months of 2000 and 1999, respectively. The effective rate for the nine months ended September 30, 2000 is not comparable to the nine months ended September 30, 1999 due primarily to certain merger related expenses and the establishment of a valuation allowance for certain deferred tax assets. The valuation allowance was established due to the uncertain realization of those assets in light of the Company's operating performance in 2000. 31
LIQUIDITY AND CAPITAL RESOURCES September 30, December 31, 2000 1999 -------------------------------------------------------- (Dollars in millions) Cash and equivalents . . $ 19.9 $ 17.7 Current assets . . . . . 184.7 212.0 Current liabilities. . . 343.7 76.0 Working capital. . . . . (159.0) 136.0 Current portion of debt. 271.0 4.0 Long-term debt . . . . . 0.0 227.0
Nine Months Ended September 30, 2000 1999 ----------------------------------------------------------- (Dollars in millions) Cash provided by operations. . . . . . $ 8.1 $ 60.3 Cash used by investing activities. . . (42.3) (151.0) Cash provided by financing activities. 36.3 93.6
The Company's total debt, net of cash, at September 30, 2000 was $251.1 million, an increase of approximately $12.7 million from June 30, 2000. Historically, the Company has used cash from operations for the development and acquisition of new products, capital expenditures, acquisition of businesses and repurchases of the Company's stock. For the third quarter of 2000, compared with the third quarter of 1999 however, the Company significantly decreased expenditures in all these areas and expects these expenditures during 2000 to continue at amounts lower than 1999. As of September 30, 2000, the Company had a $180.0 million line of credit of which $180.0 million was outstanding. Availability under this credit line will be reduced to $125 million on April 1, 2001 and will expire on July 1, 2001. The Company's $70.0 million term loan, all of which was outstanding at September 30, 2000, matures on January 31, 2001. CSC has provided the Company a line of credit up to $30.0 million for operational working capital needs. No funds were outstanding on the CSC line of credit as of September 30, 2000. On the Agreement and Plan of Merger, CSC has advanced to the Company the cash to pay the $19.0 million termination fee due to WCAS upon the termination of the WCAS merger agreement. CSC has also agreed to advance up to $5.0 million for related expenses. The funds for expenses have not yet been advanced. Any amounts due CSC mature on July 3, 2001. 32 On September 29, 2000, the Company further amended both the $180.0 million line of credit and $70.0 million term loan agreements, as amended in July 2000. The affects of these amendments were to bring the Company into compliance with the defined Consolidated Adjusted Cash Flow and the Minimum Tangible Net Worth covenants. That amendment provides for the exclusion from the Consolidated Adjusted Cash Flow covenant of up to $10.0 million in expenses due to the Company's August 2000, reduction in force. In addition, the amendment reduced the required minimum amount of Consolidated Adjusted Cash Flow for the quarter ended September 30, 2000 from $30.0 million to $10.0 million. The amendment also reduced the required level of Minimum Consolidated Tangible Net Worth as of September 30, 2000, from $196.7 million to $126.7 million until October 31, 2000. Under the terms of this amendment, credit available under the $180.0 line of credit was temporarily reduced to $175.0 million. On October 31, 2000, the agreements were amended again to reduce the required level of Minimum Consolidated Tangible Net Worth as of October 31, 2000 to $126.7 million until November 24, 2000. Future credit availability under the Company's amended credit agreements is dependent upon the Company achieving improvements in its operating performance. In light of the uncertainties surrounding future performance and the Company's current debt position, the Company is exploring alternative means to reduce its debt, some of which would be subject to approval by CSC. Significant expenditures anticipated for the remainder of 2000, excluding new product development are as follows: acquisition of data processing and communications equipment, support software, office furniture, fixtures and equipment ($3.0 million) and costs relating to the continued enhancement of existing software products ($11.0 million). FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's operating results and financial condition may be impacted by a number of factors, including, but not limited to, the following, any of which could cause actual results to vary materially from current and historical results or the Company's anticipated future results. Currently, the Company's business is focused principally within the global property and casualty and life and financial services industries. Significant changes in the regulatory or market environment of these industries could impact demand for the Company's software products and services. Additionally, there is significant competition for the Company's products and services, and there can be no assurance that the Company's current products and services will remain competitive, or that the Company's development efforts will produce products with the cost and performance characteristics necessary to remain competitive. Furthermore, the market for the Company's products and services is characterized by rapid changes in technology and the emergence of the Internet as a viable insurance distribution channel. The Company's success will depend on the level of market acceptance of the Company's products, technologies and enhancements, and its ability to introduce such products, technologies and enhancements to the market on a timely and cost effective basis, and maintain a labor force sufficiently skilled to compete in the current environment. 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. 33 The timing and amount of the Company's revenues are subject to a number of factors, such as the timing of customers' decisions to enter into large license agreements with the Company, which make estimation of operating results prior to the end of a quarter or year extremely uncertain. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Amounts affected by these estimates include, but are not limited to, the estimated useful lives, related amortization expense and carrying values of the Company's intangible assets and the net realizable value of capitalized software development costs and accrued reserves established for contingencies such as litigation and restructuring activities. Changes in the status of certain matters or facts or circumstances underlying these estimates could result in material changes to these estimates, and actual results could differ from these estimates. A significant portion of both the Company's revenues and its operating income is derived from initial licensing agreements received as part of the Company's software licensing activities. Because a substantial portion of these revenues are recorded at the time systems are licensed, there can be significant fluctuations from quarter-to-quarter and year-to-year in the revenues and operating income derived from licensing activities. This is attributable principally to the timing of customers' decisions to enter into license agreements with the Company, which the Company is unable to control. The Company believes that during the second and third quarters of 2000, uncertainty concerning the Company's future ownership, including the proposed merger with CSC, adversely affected customers' decisions to license software from the Company. Management anticipates that this adverse effect will continue until the uncertainty is resolved. The Year 2000 has caused an unprecedented level of investment in systems and remediation services that may adversely affect customers' decisions to invest in new application software. In addition, the Company believes that system evaluations and decision processes are being affected by uncertainties related to the Internet and its emergence as a viable insurance distribution channel is causing a re-evaluation of the traditional methods of distribution for insurance products. The Company also believes that in order for insurance companies to capitalize on this new distribution method they will be required to redesign their business models and related support systems. The issues raised by the emergence of the Internet and related technology requirements will be distracting and confusing for many insurance companies and complicate the process of transitioning the insurance industry to modern architecture. Therefore, customer uncertainty as to their Internet and enterprise business strategies may extend sales cycles for large enterprise systems. The above factors limit the Company's ability to accurately predict licensing and services demand. Because of the foregoing factors, as well as other factors affecting the Company's operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. 34 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Statements in this report that are not descriptions of historical facts may be forward-looking statements that are subject to risks and uncertainties, including economic, competitive and technological factors affecting the Company's operations, markets, products, services and prices, as well as other specific factors discussed above and in the Company's filings with the Securities and Exchange Commission. These and other factors may cause actual results to differ materially from those anticipated. 35 PART II OTHER INFORMATION MYND CORPORATION (FORMERLY POLICY MANAGEMENT SYSTEMS CORPORATION) ITEM 1. LEGAL PROCEEDINGS. See Note 3, Contingencies, of Notes to Consolidated Financial Statements, which is incorporated by reference in this Item. ITEMS 2 AND 3 are not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At the Company's Annual Meeting of Stockholders, held on September 27, 2000, the Company's stockholders approved: (i) the election of three directors, Alfred R. Berkeley, III (24,727,319 for and 646,636 withheld), Donald W. Feddersen (24,727,319 for and 646,636 withheld) and Richard G. Trub (24,726,466 for and 647,489 withheld) to serve a term of three years; (ii) the approval of an Amendment to the Company's Articles of Incorporation to change the Company's name to Mynd Corporation (25,237,869 for, 121,569 against and 14,517 abstain); (iii) the ratification of the selection of PricewaterhouseCoopers, LLP as independent auditors (25,310,083 for, 51,829 against and 12,043 abstain). The following directors' terms continued through the 2000 Annual Meeting of Stockholders: Dr. John Palms, John P. Seibels, Joseph D. Sargent, and G. Larry Wilson. ITEM 5 is not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. Exhibits Exhibits required to be filed with this Quarterly Report on Form 10-Q are listed in the following Exhibit Index. The Company did not file any reports on Form 8-K during the quarter ended September 30, 2000. 36 MYND CORPORATION (FORMERLY 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. MYND CORPORATION ---------------- (Registrant) Date: November 14, 2000 /S/ Timothy V. Williams --------------------------- Timothy V. Williams Executive Vice President (Chief Financial Officer) 37 POLICY MANAGEMENT SYSTEMS CORPORATION EXHIBIT INDEX TO FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2000 Exhibit ------- Number ------- 2. PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION 1. Agreement and Plan of Merger between Politic Acquisition Corporation and Policy Management Systems Corporation dated March 30, 2000 (filed as an exhibit to Form 8-K dated March 30, 2000 and is incorporated herein by reference) 2. Amended and Restated Agreement and Plan of Merger between Politic Acquisition Corporation and Policy Management Systems Corporation dated as of April 27, 2000 (filed as an exhibit to Form S-4, Registration Statement, dated April 29, 2000 and is incorporated herein by reference) 3. Agreement and Plan of Merger among Computer Sciences Corporation, Patriot Acquisition Corporation and Policy Management Systems Corporation dated June 20, 2000 (filed as an exhibit to Schedule 14-D9/A dated July 19, 2000 and is incorporated herein by reference) 3. ARTICLES OF INCORPORATION AND BY-LAWS 1. Bylaws of the Company, as amended through September 2, 1999 incorporating all amendments thereto subsequent to July 19, 1994 (filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1999, and is incorporated herein by reference) 2. ARTICLES OF INCORPORATION OF THE COMPANY, AS AMENDED THROUGH SEPTEMBER 27, 2000, INCORPORATING ALL AMENDMENTS THERETO SUBSEQUENT TO OCTOBER 31, 1994 (FILED HEREWITH) 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES 1. Specimen forms of certificates for Common Stock of the Company (filed as an Exhibit to Registration Statement No. 2-74821, dated December 16, 1981, and is incorporated herein by reference) 2. Articles of Incorporation of the Company, as amended through October 13, 1994, incorporating all amendments thereto subsequent to December 31, 1993 (filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is incorporated herein by reference) 1 10. MATERIAL CONTRACTS 1. Conformed copy of Development and Marketing Agreement between International Business Machines Corporation and Policy Management Systems Corporation, dated July 26, 1989 (File No. 0-10175 - filed under cover of Form SE filed on September 29, 1989, and is incorporated herein by reference) 2. Policy Management Systems Corporation 1989 Stock Option Plan (File No. 0-10175 - filed under cover of Form SE on March 22, 1991, and is incorporated herein by reference) 3. Deferred Compensation Agreement with G. Larry Wilson (filed as an Exhibit to Form 10-K for the year ended December 31, 1993, and is incorporated herein by reference) 4. Employment Agreement with Stephen G. Morrison (filed as an Exhibit to Form 10-Q for the quarter ended March 31, 1994, and is incorporated herein by reference) 5. Stock Option/Non-Compete Agreement with Stephen G. Morrison (filed as an Exhibit to Form 10-Q for the quarter ended March 31, 1994, and is incorporated herein by reference) 6. Employment Agreement with Timothy V. Williams (filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is incorporated herein by reference) 7. Stock Option/Non-Compete Form Agreement for named executive officers together with schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1992, and is incorporated herein by reference) 8. Stock Option/Non-Compete Form Agreement for named executive officers together with schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-Q for the quarter ended September 30, 1994, and is incorporated herein by reference) 9. Stock Option/Non-Compete Form Agreement for named executive officers together with schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is incorporated herein by reference) 10. Policy Management Systems Corporation 1993 Long-Term Incentive Plan for Executives (filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is incorporated herein by reference) 11. First Amendment to the Policy Management Systems Corporation 1989 Stock Option Plan (filed as an Exhibit to Form 10-K for the year ended December 31, 1994, and is incorporated herein by reference) 12. Fourth Amendment to the Policy Management Systems Corporation 1989 Stock Option Plan (filed as an Exhibit to Form 10-Q for the quarter ending March 31, 1995, and is incorporated herein by reference) 13. Second and Third Amendments to the Policy Management Systems Corporation 1989 Stock Option Plan (filed as an Exhibits and to Form 10-Q for the quarter ended June 30, 1995, and is incorporated herein by reference) 2 14. Stock Option/Non-Compete Form Agreement for named executive officers together with schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1995, and is incorporated herein by reference) 15. Stock Option/Non-Compete Form Agreement for named executive officers together with schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-K for year ended December 31, 1995, and is incorporated herein by reference) 16. Stock Option/Non-Compete Form Agreement for named executive officers together with schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-K for year ended December 31, 1995, and is incorporated herein by reference) 17. Stock Option/Non-Compete Agreement with Timothy V. Williams dated February 1, 1994 (filed as an Exhibit to Form 10-K for year ended December 31, 1995, and is incorporated herein by reference) 18. Stock Option/Non-Compete Agreement with Timothy V. Williams dated May 10, 1995 (filed as an Exhibit to Form 10-K for year ended December 31, 1995, and is incorporated herein by reference) 19. Registration Rights Agreement, dated March 8, 1996, between Policy Management Systems Corporation and Continental Casualty Company (filed as an Exhibit to Form 10-Q for the quarter ended March 31, 1996, and is incorporated herein by reference) 20. Shareholders Agreement dated March 8, 1996 between Policy Management Systems Corporation and Continental Casualty Company (filed as an Exhibit to Form 10-Q for the quarter ended March 31, 1996, and is incorporated herein by reference) 21. Stock Option/Non-Compete Form Agreement for named executive officers together with schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-Q for the quarter ended June 30, 1996, and is incorporated herein by reference) 22. Employment Agreement Form dated November 7, 1996 for Messrs. Morrison and Williams together with a schedule identifying particulars for each executive officer (filed as an Exhibit to Form 10-K for year ended December 31, 1996 and is incorporated herein by reference) 23. Stock Option/Non-Compete Agreement with Stephen G. Morrison dated October 22, 1996 (filed as an Exhibit to Form 10-K for year ended December 31, 1996 and is incorporated herein by reference) 24. Stock Option/Non-Compete Form Agreement for named executive officers together with schedule identifying particulars for each executive officer (filed as an Exhibit to Form 10-Q for the quarter ended March 31, 1997 and is incorporated herein by reference) 25. Form of Amendment No. 1 to the Employment Agreements with Messrs. Morrison and Williams, together with schedule identifying particulars for each executive officer (filed as an Exhibit to Form 10-Q for Quarter ended June 30, 1997 and is incorporated herein by reference) 3 26. Form of Employment Agreements with Messrs. Wilson and Bailey, together with schedule identifying particulars for each executive officer (filed as an Exhibit to Form 10-Q for Quarter ending September 30, 1997 and is incorporated herein by reference) 27. Credit Agreement dated as of August 8, 1997 among Policy Management Systems Corporation, the Guarantors Party hereto, Bank of America National Trust and Savings Association and the Other Financial Institution Party Hereto (filed as an Exhibit to Form 10-Q for Quarter ending September 30, 1997 and is incorporated herein by reference) 28. Stock Option/Non-Compete Form Agreement for named executive officers together with schedule identifying particulars for each named executive officer (filed as an Exhibit to the Form 10-Q for the quarter ended March 31, 1998, and is incorporated herein by reference) 29. Policy Management Systems Corporation Restricted Stock Ownership Plan (filed as an Exhibit to Form 10-Q for Quarter ended September 30, 1998 and is incorporated herein by reference) 30. Form of Restricted Stock Award Agreement dated August 11, 1998 with Messrs. Berkeley, Feddersen, Palms, Sargent, Seibels and Trub (filed as an Exhibit to Form 10-Q for Quarter ended September 30, 1998 and is incorporated herein by reference) 31. Employment Agreement with Michael W. Risley dated February 23, 1999, effective November 10, 1998 (filed as an Exhibit to Form 10-K for the year ended December 31, 1998 and is incorporated herein by reference) 32. Form of Restricted Stock Award Agreement dated March 1, 1999 with Messrs. Berkeley, Feddersen, Palms, Sargent, Seibels and Trub (filed as an Exhibit to Form 10-Q for Quarter ending March 31, 1999 and is incorporated herein by reference) 33. Form of Restricted Stock Award Agreement for named executive officers together with schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-Q for Quarter ending March 31, 1999 and is incorporated herein by reference) 34. Stock Option/Non-Compete Form Agreement for named executive officers together with schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-Q for Quarter ending June 30, 1999 and is incorporated herein by reference) 35. Stock Option/Non-Compete Form Agreement with Michael W. Risley dated May 11, 1999 (filed as an Exhibit to Form 10-Q for Quarter ending June 30, 1999 and is incorporated herein by reference) 36. Form of 1999 Bonus Plan for named executive officers together with schedule identifying particulars for each named executive officer (filed as an Exhibit to Form 10-Q for Quarter ending June 30, 1999 and is incorporated herein by reference) 37. Promissory Note dated July 21, 1999 between Policy Management Systems Corporation and First Union National Bank (filed as an Exhibit to Form 10-Q for Quarter ending September 30, 1999 and is incorporated herein by reference) 4 38. Modification Number One dated October 15, 1999 to the Promissory Note between Policy Management Systems Corporation and First Union National Bank dated July 21, 1999 (filed as an exhibit to Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference) 39. Modification Number Two dated October 28, 1999 to the Promissory Note between Policy Management Systems Corporation and First Union National Bank dated July 21, 1999 (filed as an exhibit to Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference) 40. Stock Option/Non-Compete Form Agreement dated May 11, 1999 for named executive officers together with schedule identifying particulars for each named executive officer (filed as an exhibit to Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference) 41. Stock Option/Non-Compete Form Agreement dated August 9, 1999 with Mr. Harald J. Karlsen (filed as an exhibit to Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference) 42. Stock Option/Non-Compete Form Agreement dated November 8, 1999 for named executive officers together with schedule identifying particulars for each named executive officer (filed as an exhibit to Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference) 43. Form of Restricted Stock Award Agreement dated February, 1999 for Mr. Michael D. Gantt (filed as an exhibit to Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference) 44. Change in Control Severance Pay Plan for Select Employees dated October 22, 1996 together with schedule identifying particulars for Michael D. Gantt and Harald J. Karlsen (filed as an exhibit to Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference) 45. Term Loan Agreement between Policy Management Systems Corporation, the Guarantors Party, Bank of America, N.A. and other financial institutions in the amount of $70 million dated November 5, 1999 (filed as an exhibit to Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference) 5 46. Form of Restricted Stock Award Agreement dated March 1, 2000 with Messrs. Berkeley, Feddersen, Palms, Sargent and Trub with schedule identifying particulars for each named Director (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) The Schedule for 46 contained the following: Named Director Number Granted --------------- --------------- Al Berkeley 1,491 Don Feddersen 1,491 John Palms 1,491 Joe Sargent 1,491 Richard Trub 1,491 47. First Amendment to the Credit Agreement dated as of November 5, 1999, between Policy Management Systems Corporation, Bank of America, N.A. and the other financial institutions thereto Director (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) 48. Second Amendment to the Credit Agreement dated as of February 10, 2000 between Policy Management Systems Corporation, Bank of America, N.A. and the other financial institutions thereto (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) 49. Third Amendment to the Credit Agreement dated as of March 30, 2000 between Policy Management Systems Corporation, Bank of America, N.A. and the other financial institutions thereto (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) 50. Fourth Amendment to the Credit Agreement dated as of April 24, 2000 between Policy Management Systems Corporation, Bank of America, N.A. and the other financial institutions thereto (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) 51. First Amendment to Term Loan Agreement dated as of February 10, 2000 between Policy Management Systems Corporation, Bank of America, N.A. and the other financial institutions thereto (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) 52. Second Amendment to Term Loan Agreement dated as of March 30, 2000 between Policy Management Systems Corporation, Bank of America, N.A. and the other financial institutions thereto (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) 53. Third Amendment to Term Loan Agreement dated as of April 24, 2000 between Policy Management Systems Corporation, Bank of America, N.A. and the other financial institutions thereto (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) 6 54. Security Agreement dated as of April 28, 2000, among Policy Management Systems Corporation, certain of its subsidiaries, and Bank of America, N.A., as Administrative Agent (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) 55. Pledge Agreement dated as of April 28, 2000, between Policy Management Systems Corporation, certain of its subsidiaries, and Bank of America, N.A., as Administrative Agent (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) 56. Mortgage Agreement dated as of April 28, 2000, between Policy Management Systems Corporation and Bank of America, N.A., as Administrative Agent (filed as an exhibit to Form 10-Q for the Quarter ended March 31, 2000 and is incorporated herein by reference) 57. Form of Employee Stock Option/Non Compete Agreement dated April 3, 2000 with schedule identifying particulars for each named officer (filed as an exhibit to Form 10-Q for the Quarter ended June 30, 2000 and is incorporated herein by reference) The Schedule for 57contained the following: OFFICERS OPTIONS RECEIVED -------- ----------------- David T. Bailey 35,000 Michael D. Gantt 35,000 Harald J. Karlsen 25,000 Stephen G. Morrison 35,000 Michael W. Risley 35,000 Timothy V. Williams 35,000 G. Larry Wilson 75,000 58. Form of Memorandum regarding Grant of 15,000 Stock Options dated April 5, 2000 with schedule identifying particulars for each director (filed as an exhibit to Form 10-Q for the Quarter ended June 30, 2000 and is incorporated herein by reference) The Schedule for 58 contained the following: DIRECTORS --------- Alfred R. Berkeley, III Donald W. Feddersen Dr. John M. Palms Joseph D Sargent John P. Seibels Richard G. Trub 59. Consent and Waiver dated June 19, 2000 relating to the Credit Agreement between Policy Management Systems Corporation, the Guarantors, Bank of America, N.A., and the other financial institutions thereto (filed as an exhibit to Form 10-Q for the Quarter ended June 30, 2000 and is incorporated herein by reference) 60. Consent, Waiver and Amendment dated June 19, 2000 relating to the Term Loan Agreement between Policy Management Systems Corporation, the Guarantors, Bank of America, N.A., and the other financial institutions thereto (filed as an exhibit to Form 10-Q for the Quarter ended June 30, 2000 and is incorporated herein by reference) 7 61. Consent and Waiver dated June 20, 2000 relating to the Credit Agreement between Policy Management Systems Corporation, the Guarantors, Bank of America, N.A., and the other financial institutions thereto (filed as an exhibit to Form 10-Q for the Quarter ended June 30, 2000 and is incorporated herein by reference) 62. Consent and Waiver dated June 20, 2000 relating to the Term Loan Agreement between Policy Management Systems Corporation, the Guarantors, Bank of America, N.A., and the other financial institutions thereto (filed as an exhibit to Form 10-Q for the Quarter ended June 30, 2000 and is incorporated herein by reference) 63. Consent, Waiver and Fifth Amendment to Credit Agreement dated July 14, 2000 between Policy Management Systems Corporation, the Guarantors, Bank of America, N.A., and the other financial institutions thereto (filed as an exhibit to Form 10-Q for the Quarter ended June 30, 2000 and is incorporated herein by reference) 64. Consent and Waiver dated July 14, 2000 relating to the Term Loan Agreement between Policy Management Systems Corporation, the Guarantors, Bank of America, N.A., and the other financial institutions thereto (filed as an exhibit to Form 10-Q for the Quarter ended June 30, 2000 and is incorporated herein by reference) 65. Fifth Amendment to Term Loan Agreement dated as of August ___, 2000 between Policy Management Systems Corporation, Bank of America, N.A., the Guarantors, and the other financial institutions thereto (filed as an exhibit to Form 10-Q for the Quarter ended June 30, 2000 and is incorporated herein by reference) 66. Sixth Amendment to the Credit Agreement dated as of August __, 2000 between Policy Management Systems Corporation, Bank of America, N.A., the Guarantors, and the other financial institutions thereto (filed as an exhibit to Form 10-Q for the Quarter ended June 30, 2000 and is incorporated herein by reference) 67. Subordination Agreement dated June 20, 2000 between Computer Sciences Corporation, Bank of America, N.A. and Policy Management Systems Corporation (filed as an exhibit to Form 10-Q for the Quarter ended June 30, 2000 and is incorporated herein by reference) 68. Promissory Note dated June 20, 2000 by Policy Management Systems Corporation in favor of Computer Sciences Corporation (filed as an exhibit to Form 10-Q for the Quarter ended June 30, 2000 and is incorporated herein by reference) 69. Working Capital Promissory Note dated August 3, 2000 by Policy Management Systems Corporation in favor of Computer Sciences Corporation (filed as an exhibit to Form 10-Q for the Quarter ended June 30, 2000 and is incorporated herein by reference) 8 70. FORM OF 2000 BONUS PLAN FOR NAMED EXECUTIVE OFFICERS TOGETHER WITH SCHEDULE IDENTIFYING PARTICULARS FOR EACH NAMED EXECUTIVE OFFICER (FILED HEREWITH) 71. P LEDGE AGREEMENT DATED AUGUST 3, 2000 BETWEEN POLICY MANAGEMENT SYSTEMS CORPORATION AND BANK OF AMERICA, N.A. (FILED HEREWITH) 72. SIXTH AMENDMENT TO TERM LOAN AGREEMENT DATED AS OF SEPTEMBER 29, 2000 BETWEEN MYND CORPORATION (FORMERLY KNOWN AS POLICY MANAGEMENT SYSTEMS CORPORATION), BANK OF AMERICA, N.A., THE GUARANTORS, AND THE OTHER FINANCIAL INSTITUTIONS THERETO (FILED HEREWITH) 73. SEVENTH AMENDMENT TO THE CREDIT AGREEMENT DATED AS OF SEPTEMBER 29, 2000 BETWEEN MYND CORPORATION (FORMERLY KNOWN AS POLICY MANAGEMENT SYSTEMS CORPORATION), BANK OF AMERICA, N.A., THE GUARANTORS, AND THE OTHER FINANCIAL INSTITUTIONS THERETO (FILED HEREWITH) 74. SEVENTH AMENDMENT TO TERM LOAN AGREEMENT DATED AS OF OCTOBER 31, 2000 BETWEEN MYND CORPORATION (FORMERLY KNOWN AS POLICY MANAGEMENT SYSTEMS CORPORATION), BANK OF AMERICA, N.A., THE GUARANTORS, AND THE OTHER FINANCIAL INSTITUTIONS THERETO (FILED HEREWITH) 75. EIGHTH AMENDMENT TO THE CREDIT AGREEMENT DATED AS OF OCTOBER 31, 2000 BETWEEN MYND CORPORATION (FORMERLY KNOWN AS POLICY MANAGEMENT SYSTEMS CORPORATION), BANK OF AMERICA, N.A., THE GUARANTORS, AND THE OTHER FINANCIAL INSTITUTIONS THERETO (FILED HEREWITH) 27. FINANCIAL DATA SCHEDULE A. Filed herewith 9