The Company owns its 700,000 square foot headquarters complex located on 145 acres in Blythewood, South Carolina. The Company leases space at 35 various locations domestically for its regional and branch offices throughout the United States. Internationally, the Company has 13 locations throughout Canada, Europe and the Pacific Rim.
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:
Licensing 1995 Change 1994 Change 1993 (Dollars In Millions) Initial charges $ 48.8 28.1% $38.1 43.8% $26.5 Monthly charges 53.3 4.5 51.0 5.8 48.2 $102.1 14.6% $89.1 19.3% $74.7
Initial license revenues for 1995 increased $10.7 million (28.1%) due principally to an increase in property and casualty insurance licensing activity of $16.2 million. This increase is primarily the result of a $13.6 million increase in international licensing activity, related principally to licensing activity of Creative, which was acquired by the Company on December 31, 1994 (see table below). Domestic property and casualty insurance licensing revenues, which increased $2.6 million for 1995, include $4.0 million in non-recurring revenue related to a source code license agreement with a cross-industry vendor. The source code license agreement relates to a productivity and utility system developed by the Company to enhance computer resource management and control. This system allows for the expansion of computer capability without the associated overhead costs. Under the license agreement there is no ongoing obligation by the Company to maintain this system and accordingly, no monthly license revenues will be recognized. The Company also entered into a long-term license and maintenance agreement with this same vendor covering certain operating system management software products for use in the Company's worldwide data center operations. This agreement replaced three previous five-year term agreements executed in 1993, and other related agreements (see Note 8 of Notes to Consolidated Financial Statements). Domestic property and casualty insurance license revenues for 1995 also include $3.3 million relating to a distribution agreement, and $1.5 million relating to a marketing arrangement for a UNIX-based version of the POINT system, both with NCR Corporation (NCR), formerly AT&T Global Information Solutions. During 1994, the Company recognized licensing revenues of $3.8 million from NCR. Initial license revenues include $1.6, $1.3, and $7.0 million relating to right-to-use charges for 1995, 1994 and 1993, respectively. Additionally, initial license revenues include $3.5 and $.2 million relating to termination charges for 1995 and 1994, respectively. The increase in property and casualty initial license revenues for 1995 was offset in part by a $6.6 million decrease in health insurance initial licensing revenue (see Note 11 of Notes to Consolidated Financial Statements).
1995 1994 1993 (Dollars In Millions) Property and Casualty: Domestic $21.4 $18.8 $22.6 International 15.8 2.2 3.7 Total $37.2 $21.0 $26.3
Monthly license revenues for 1994 increased $2.8 million (5.8%) compared to 1993. This increase is principally related to an increase attributable to licenses acquired as part of the acquisition of CYBERTEK Corporation in August 1993, increased maintenance revenues related to servicing life insurers in the Nordic market and to other new licensing activities in both the domestic and international life insurance markets. This increase was partially offset by a $1.6 million decline in other licensing activity, principally the health insurance systems business.
Services 1995 Change 1994 Change 1993 (Dollars In Millions) Professional and outsourcing $260.3 24.8% $208.6 13.7% $183.5 Information 172.3 (10.7) 193.0 .7 191.7 Other 2.6 .3 2.0 (37.5) 3.2 $435.2 7.8% $403.6 6.7% $378.4
Professional and outsourcing services revenues for 1994 increased $25.1 million (13.7%) compared to 1993. This increase was principally related to additional services from existing and new contracts with property and casualty insurance companies and residual markets of $25.9 million for total policy management outsourcing services, an increase of $10.2 million in services arising out of the acquisition of CYBERTEK Corporation in August 1993 and $13.8 million of additional services from the Company's European life insurance business, principally related to new customers and the acquisition of a data center, including its workforce, in Bergen, Norway, in December 1993. These increases were partially offset by the wind-down of the New Jersey Market Transition Facility (MTF) project, where revenues from this property and casualty business decreased from $19.7 million in 1993 to $3.4 million in 1994 and to a decrease of $6.7 million in the Company's health insurance systems business. As a result of an increased role in servicing additional new contracts with insurance companies and residual markets, the Company started to replace revenues lost from the MTF during 1994. The increase in new outsourcing services in Europe is principally the result of signing one of the largest outsourcing agreements in the Company's history in December 1993.
Employee compensation and benefits increased $7.1 million (4.3%) for 1994 compared with 1993, and is principally related to an increase of $16.1 million in costs associated with the acquisition of CYBERTEK Corporation in August 1993, the acquisition of a data center, including its workforce, in Bergen, Norway, in December 1993, and the increased use of temporary labor throughout the year. The increase in costs associated with these acquisitions was partially offset by a reduction in compensation and other benefits of $7.8 million resulting from a downsizing in the Company's health insurance services staff from 388 at the end of 1993 to 220 at the end of 1994. These staff reductions were part of the Company's restructuring of its health business (see Note 12 of Notes to Consolidated Financial Statements).
Computer and communications expenses increased $5.5 million (21.5%) to $30.9 million for 1995 compared to $25.4 million for 1994. This increase is due principally to expenses for certain operating system management software products utilized in the Company's worldwide data center operations (see Note 8 of Notes to Consolidated Financial Statements), and increased communications, data circuit and maintenance costs associated with the growth of the Company's domestic and international outsourcing operations. As a percentage of professional and outsourcing revenues, however, computer and communications expenses remained relatively constant at 11.9% for 1995 compared to 12.2% for 1994.
Information services and data acquisition costs decreased $18.9 million (14.3%) for 1995 compared to 1994, due principally to a decrease in the volume of state fees for motor vehicle reports associated with the domestic property and casualty automobile and information services business (see Revenue discussion above and Note 12 of Notes to Consolidated Financial Statements).
During the fourth quarter of 1995, the Company recorded charges aggregating $4.1 million to provide for the costs of restructuring its property and casualty risk information services business ($3.7 million) and costs associated with the consolidation of existing operations with those of an acquired business in Germany ($.4 million). Additionally, during the fourth quarter of 1995, the Company recorded charges aggregating $6.7 million to write-off or write-down, as appropriate, the carrying values of certain identifiable intangible assets and goodwill related to prior business acquisitions ($5.2 million) and computer software ($1.5 million). During 1995, the Company had a net reduction in its restructuring reserves of $.2 million principally related to the completion of certain restructuring activities for its life and health insurance systems businesses.
During November, 1995, the Company entered into an alliance with a leading database information enterprise to provide this enterprise with motor vehicle reports and receive access to a database containing approximately 80% of the available automotive claims history information in the United States. This agreement is expected to contribute to the long-term improvement of the automobile information services business, although the combination of the above existing factors may result in continued near-term losses. For the year ended December 31, 1995, the automobile information services business reported a loss of $1.1 million on revenues of $87.6 million.
The Company has applied its methodology for measuring impairment (see Note 1 of Notes to Consolidated Financial Statements) by discounting expected future cash flows. In determining its forecasted future results, the Company considered historical financial performance, current and prospective insurance industry environment and market conditions and the long-term opportunities for future growth in the respective businesses. The Company believes that its forecasted future results based on current market conditions and recent historical trends, is the best estimate of the Company's discounted future cash flows.
The Company recorded certain impairment and restructuring charges amounting to $30.7 and $80.7 million for 1994 and 1993, respectively. The amount recorded in October 1994 includes a $21.6 million charge related to the impairment of identifiable intangible assets and goodwill associated with acquired businesses, principally the property and casualty automobile and risk information services business, an $11.5 million charge related to the impairment of acquired software products, which were discontinued, a $4.4 million credit related to a change in the Company's estimates associated with certain restructuring reserves established in June 1993 and a $2.0 million charge related to established liabilities for the costs of terminating certain lease obligations in the United Kingdom and related costs of consolidating the Company's existing operations with those of an acquired business in the United Kingdom. Impairment charges were recorded in June 1993 to reduce the carrying value of certain identifiable intangible assets and goodwill related to its health insurance systems business of $54.9 million and restructuring charges of $25.2 million associated with employee severance and outplacement ($5.2 million), and to an ongoing lease obligation and/or termination for the planned future abandonment of certain leased office facilities ($20.0 million). The Company also recorded other restructuring charges of $.6 million at June 30, 1993 (see Note 12 of Notes to Consolidated Financial Statements).
The acquisition of CYBERTEK provided the Company with the opportunity to develop new releases of certain of its life software systems based on the business functions of CYBERTEK software, and to assess strategic changes in direction related to the Company's development of its future life software systems. As a result, the Company determined in the fourth quarter of 1994 that certain business operations and software systems acquired from Genesis, of Krumpendorf, Austria would not be compatible with the Company's future direction. The Company decided that it would cease operations related to this Austrian business and would no longer market or license Aussen-und Innendienst Workstation, the software system acquired from Genesis. Consequently, the Company recorded impairment charges to write-off the carrying value of certain identifiable intangible assets and goodwill of $.7 million and acquired software of $1.5 million related to this prior business acquisition.
The Company decided that in the fourth quarter of 1994 it would cease to do business in certain markets with respect to the CAPSIL business and operations acquired from Capsco Pallm Systems, Inc. The Company determined that the functionality and technical platform represented by acquired software for the domestic market would be replaced by software that has been and or is being developed in conjunction with its future strategic direction. The acquired software is, however, marketed and licensed in Southeast Asia. As a result of its evaluation, the Company determined that no write-down of the software was necessary. The Company did, however, record impairment charges of $1.8 million to reduce the carrying value of certain identifiable intangible assets ($.7 million) and goodwill ($1.1 million) relating to the acquired business in the United States.
Impairment and restructuring charges in 1993 totaling $80.7 million resulted primarily from impairment charges to reduce the carrying value of certain identifiable intangible assets and goodwill related to the Company's health insurance systems business of $54.9 million and restructuring charges of $25.2 million associated with employee severance and outplacement ($5.2 million), and to an ongoing lease obligation and/or termination for the planned future abandonment of certain leased office facilities ($20.0 million). As a part of these non-cash impairment charges, acquired software of $9.2 million was written-off. Non-cash impairment charges included certain other identifiable intangibles of $6.3 million and goodwill of $39.4 million. The Company also recorded other restructuring charges of $.6 million.
During the first half of 1993, the Company experienced a significant decrease in revenues from its health insurance systems business. The Company conducted an assessment of the potential impact of health care legislation proposed at the time, as well as rapidly evolving and significant changes in the relationship of health care providers and insurers. The Company determined that it did not have some of the systems to respond to the most likely future initiatives in the health care insurance industry, and that many of the Company's existing health insurance products, primarily those acquired in business acquisitions, would require substantial modification or complete reformation. Based on this assessment, the Company concluded that certain acquired intangible assets and software related to the health insurance systems business were not fully recoverable and, at June 30, 1993, recorded the impairment and restructuring charges described above. As the restructure of the health insurance business continued through 1994 and into 1995, the Company evaluated various alternatives and, during the second quarter of 1995, committed to sell the health insurance systems business and cease to market any health insurance related software systems. On June 30, 1995, the Company completed the sale of its health insurance systems business for a total consideration of $9.3 million in cash. After selling expense and other accrued costs, the Company recorded a pre-tax gain of $8.1 million (see Note 11 of Notes to Consolidated Financial Statements).
Although depreciation and amortization expense increased only slightly from 1994 to 1995, amortization of internally developed software costs increased $4.9 million (33.2%), due principally to amortization associated with a new release of the Company's property and casualty insurance Series III client/server software system and the initial release of its life insurance CyberLife client/server software system, both of which became generally available during the first quarter of 1995. These increases were offset by lower amortization charges resulting principally from the impairment of certain identifiable intangible assets, goodwill and software products relating to the Company's property and casualty information services business (see Note 12 of Notes to Consolidated Financial Statements) and lower depreciation charges due to certain retirements of data processing equipment.
As previously disclosed, in December 1994, the Company reached an agreement, which was subsequently approved on May 26, 1995 by the United States District Court for the District of South Carolina, to settle its shareholder class action. The settlement of $31 million was paid by the Company's Directors' and Officers' Liability Insurance Carrier, the Company's former accountants and the Company. The Company's portion of the settlement and associated litigation costs resulted in a special one-time charge of $34.2 million ($21.3 million after tax) in the fourth quarter of 1994. This represents the Company's portion of the total settlement, plus the Company's litigation costs of $18.1 million ($11.2 million after tax), less the recovery from the insurance company. In March 1995, the Company and its insurance carrier signed an agreement to settle amounts contested and the carrier agreed to pay an additional amount of $1.7 million in full settlement of the Company's claims. Accordingly, the Company recorded a credit of $1.7 million, in the first quarter of 1995, as a further adjustment to the estimated costs of settling the securities class action.
The increase of $15.3 million (27.9%)in other operating costs and expenses from 1994 to 1995 is principally attributable to an increase in the Company's use of outside consultants and independent contractors relating to increased professional services activities and costs of Creative, acquired at December 31, 1994. Additionally, the Company experienced increased operating costs associated with increased total policy management outsourcing services activity (see Revenue discussion above). These increases were offset in part by an increase in amounts capitalized, principally associated with the internal development of the Company's property and casualty insurance and life insurance client/server software systems and by a decrease in general legal costs.
Other operating costs and expenses for 1994 decreased $14.8 million (21.3%) compared with 1993. The decrease is primarily attributable to $16.4 million of charges related to early project terminations, the deductible under the Company's Directors' and Officers' liability insurance policy in response to shareholder litigation, cost overruns on certain projects and other related charges recorded in June, 1993. In addition to these charges, other operating costs and expenses declined as a result of reduced costs associated with equipment sold, a decrease in costs associated with the wind-down of the New Jersey MTF project, a decrease associated with the recovery of certain receivables previously written off, and an increase in amounts capitalized principally related to the internal development of the Company's life software systems. These decreases were partially offset by an increase in operating costs associated with providing total policy management outsourcing services for new customers.
Operating income, excluding the gain and special charges, was $65.1 million for 1995, compared with $52.2 million for 1994 and $21.7 million for 1993. The consecutive increases in operating income from 1993 through 1995, excluding the gain and special charges, results principally from increases in initial license revenues from both property and casualty and life insurers of $17.3
million from 1994 to 1995 and $5.1 million from 1993 to 1994, increases in professional and outsourcing services revenues from new international services contracts and new and existing contracts with domestic property and casualty insurance companies and residual markets of $51.3 million from 1994 to 1995 and $29.2 million from 1993 to 1994, and from increases in new professional and outsourcing services revenues from life insurers of $16.4 million from 1994 to 1995 and $24.4 million from 1993 to 1994, principally the result of the acquisition of CYBERTEK in 1993 (see Revenues). Operating income, as a percentage of total revenues, excluding the effects of the gain and special charges as described above, increased to 12.1% for 1995 from 9.7% for 1994 and 4.8% for 1993.
Set forth below is a comparison of initial license revenues by quarter expressed as a percentage of total initial license revenues and total revenues for each of the years presented: First Second Third Fourth Quarter Quarter Quarter Quarter Total (Dollars In Millions) 1995 $11.9 $ 9.5 $11.3 $16.1 $ 48.8 Initial license revenues 24.5% 19.4% 23.1% 33.0% 100.0% Total revenues 8.9% 7.1% 8.6% 11.6% 9.1%
Revenues from professional and outsourcing services activities, as a function of total revenues increased from 40.5% for 1993 to 42.3% for 1994 and 48.4% for 1995 (see Revenues). Excluding the effects of professional and outsourcing services revenues from the Company's health division (sold on June 30, 1995 - see Note 11 of Notes to Consolidated Financial Statements) of $30.2 million for 1993, $23.1 million for 1994, and $7.1 million for 1995, professional and outsourcing revenues as a percentage of total revenues increased from 36.3% for 1993 to 39.5% for 1994, and 47.7% for 1995.
The information services businesses, which include property and casualty as well as life information services, produced a combined operating loss for 1994 of $2.9 million. The property and casualty information services business produced an aggregate operating loss of $6.1 million. These results were also weaker than 1993 when the property and casualty business produced an operating loss of $4.6 million, resulting in operating income of $.4 million for all information services. The 1994 performance in property and casualty was reflective of increasing price competition and changing market conditions. During 1994 and 1995, the Company took measures to evaluate and improve the property and casualty information services businesses. Nevertheless, the property and casualty information services business reported a 1995 operating loss of $5.1 million. As a result, the Company decided to cease providing certain property and casualty risk information services (see Note 12 of Notes to Consolidated Financial Statements). Despite growth in the Company's life information services businesses (see Revenues), aggregate information services revenues, which generally produce lower margins than professional and outsourcing services, as a percentage of total revenues has decreased from 42.3% for 1993, to 39.2% for 1994 and 32.1% for 1995.
The effective income tax (benefit) rate (income taxes expressed as a percentage of pre-tax income) was 61.1%, (47.8%) and (15.5%) for the years ended December 31, 1995, 1994, and 1993, respectively. The effective tax benefit rate in 1993 was significantly lower than the statutory rate due to the nontaxable write-off of goodwill related to impairment (see Note 12 of Notes to Consolidated Financial Statements). The effective tax benefit rate in 1994 changed significantly, due principally to the Company's settlement with the Internal Revenue Service relating to all issues in the 1985 through 1990 examinations. As a result of this settlement, the Company's 1994 provision for income taxes reflected a $6.0 million reduction of taxes provided in prior periods. The effective income tax benefit rate for 1994 also includes the impact of the increase in the highest marginal corporate tax rate resulting from the enactment of the Omnibus Budget Reconciliation Act of 1993. The effective income tax rate for 1995 increased further as the result of the Company's expensing, for book purposes, purchased research and development associated with its October 1, 1995 acquisition of micado (see Note 2 of Notes to Consolidated Financial Statements), nontaxable write-offs of goodwill impairment (see Note 12 of Notes to Consolidated Financial Statements) and differences between the amortization of goodwill for book and income tax purposes. These effects were offset, in part, by the higher tax basis than book basis of the assets divested related to the sale of the Company's Health Insurance Systems Division (see Note 11 of Notes to Consolidated Financial Statements) and differences between the U.S. tax rate and tax rates imposed on the income of foreign subsidiaries.
During 1995, the Company reduced its liabilities for accrued restructuring charges and employee severance and outplacement costs by $2.5 million. This reduction included cash outlays of $8.0 million, less $.8 million in non-cash discount amortization. These reductions were offset in part by $1.2 million in additional reserves established in connection with the Company's sale of its health division (see Note 11 of Notes to Consolidated Financial Statements), and $3.7 million in reserves established for the restructure of the Company's property and casualty risk information services business (see Note 12 of Notes to Consolidated Financial Statements).
During 1995, the Company expended $10.0 million to acquire a significant outsourcing contract (see Note 8 of Notes to Consolidated Financial Statements) and $28.2 million to acquire a business in Germany (see Note 2 of Notes to Consolidated Financial Statements). Additionally, the Company's capitalization of software development costs from 1994 to 1995 increased by $16.1 million, principally related to the development of its Series III property and casualty insurance software and CyberLife life insurance software.
On March 14, 1996, the Company announced that it had agreed with GAP Coinvestment Partners and General Atlantic Partners 14 L.P. (collectively "General Atlantic Investors") to repurchase 759,512 of the 1,519,024 shares of the Company's common stock held by the General Atlantic Investors. The repurchase by the Company, at $50.00 per share, approximates an aggregate cash expenditure of $38.0 million. This share repurchase, which is to be financed principally through borrowings under the Company's credit facilities, is expected to be completed during the second quarter of 1996 (see Note 15 of Notes to Consolidated Financial Statements). The remaining 759,512 of the Company's shares owned by General Atlantic Investors will be purchased by Continental Casualty Company, one of the nation's largest insurance companies and a licensee of the Company's Series III Solutions.
The timing and amount of the Company's revenues are subject to a number of factors, including, but not limited to, the timing of customers' decisions to enter into large license agreements with the Company, which make estimation of operating results prior to the end of a quarter or year extremely uncertain. Additionally, while management believes that the Company's financing needs for
A significant portion of both the Company's revenue and its operating income is derived from initial licensing charges received as part of the Company's software licensing activities. Because a substantial portion of these revenues is recorded at the time new systems are licensed, there can be significant fluctuations from period to period in the revenues and operating income derived from licensing activities. 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.
Although the Company cannot accurately determine the amounts attributable thereto, the Company has been affected by inflation through increased costs of employee compensation and other operating expenses. To the extent permitted by the marketplace for the Company's products and services, the Company attempts to recover increases in costs by periodically increasing prices. Additionally, most of the Company's license agreements and long-term services agreements provide for annual increases in charges.
Index to Consolidated Financial Statements and Supplementary Data Page Report of Independent Accountants 30
Consolidated Balance Sheets as of December 31, 1995 and 1994 32
We have audited the accompanying consolidated balance sheets of Policy Management Systems Corporation and subsidiaries as of December 31, 1995 and 1994 and the related statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
Prior to January 1, 1994, interest-bearing marketable securities were stated at amortized cost, which approximated market value. Current marketable securities are stated at the aggregate of lower of cost or market and a valuation allowance is provided for the excess, if any, of cost over market. The fair values of marketable securities are estimated based on quoted market prices for those or similar investments. Gains or losses on marketable securities are determined on the specific identification method.
Effective January 1, 1994, the Company adopted the provisions of Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (FAS 115). Pursuant to FAS 115, debt securities included in the Company's investment portfolio for which there is a positive intent and ability to hold to maturity are carried at amortized cost.
Identifiable intangible assets and goodwill are recorded and amortized over their estimated economic lives or periods of future benefit. The lives established for these assets are a composite of many factors which are subject to change because of the nature of the Company's operations. This is particularly true for goodwill which reflects value attributable to the going concern nature of acquired businesses, the stability of their operations, market presence and reputation. Accordingly, the Company evaluates the continued appropriateness of these lives and recoverability of the carrying value of such assets based upon the latest available economic factors and circumstances. The Company evaluates the recoverability of all long-lived assets including specific intangible assets and goodwill based upon a comparison of discounted estimated future cash flows from the related operations with the then corresponding carrying values of those assets. A rate considered to be commensurate with the risk involved is used to discount the cash flows. Impairment of value, if any, is recognized in the period in which it is determined.
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Assets to be Disposed Of" (SFAS 121). The Statement requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the expected future cash flows of those assets are less than the assets' carrying amount. SFAS 121 also addresses the accounting for long-lived assets that are expected to be sold or discarded. The Company will adopt SFAS 121 in 1996. As the Company's accounting policies have provided for similar accounting treatment, the effect of adoption is not expected to be material to the Company's financial condition or results of operations.
On August 24, 1993, the Company consummated the acquisition of all of the outstanding stock of CYBERTEK Corporation (CYBERTEK), for an aggregate consideration of $59.7 million in cash. CYBERTEK had over 20 years of experience in serving the data processing needs of the life insurance industry by designing and delivering a combination of data processing services, consulting services, and software. The acquisition was recorded using the purchase method of accounting. Accordingly, the Consolidated Statement of Operations of the Company for the year ended December 31, 1993 includes the results of operations of CYBERTEK only from the date of acquisition.
The total costs of the above acquisitions were determined, and assigned to the net assets acquired, as follows:
Supplemental pro-forma information is not presented since these acquisitions were not material to the Company's consolidated results of operations taken as a whole.
In accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," debt securities for which there is a positive intent and ability to hold to maturity are carried at amortized cost. Debt securities that may be sold prior to maturity and all marketable equity securities are classified as available-for-sale and carried at fair value. Net unrealized gains and losses on securities classified as available-for-sale are carried as a separate component of Stockholders' Equity. The Company has no securities classified as trading securities.
Realized gains and losses are included in net income and the cost of securities sold is based on the specific identification method. There were no sales of marketable securities during the year ended December 31, 1995. For the year ended December 31, 1994, the Company received $145.9 million proceeds from sales of available-for-sale securities, and recognized $1.9 million in gross realized losses, based on the specific identification method. The net unrealized holding gain on available-for-sale securities for the years ended December 31, 1995 and 1994, included as a component of shareholder's equity is a gain of $.1 million and loss of $.1 million, respectively. There were no sales or transfers of debt securities out of the held-to-maturity category during the year ended December 31, 1995.
Depreciation and amortization charged to expense was $28.1, $28.7 and $27.2 million for the years ended December 31, 1995, 1994 and 1993, respectively.
As a result of growth in the Company's existing client/user base, the addition of new outsourcing customers and advances in central processing unit technology, the Company, during the fourth quarter of 1995, restructured its data processing facilities by beginning migration from BIPOLAR technology to newer CMOS technology. The Company entered into renewable lease agreements for this technology (see Note 8). As a result of the migration, the Company disposed of its existing central processing unit and associated equipment, with a net book value of $18.0 million, for $4.2 million in cash, and recorded a one-time charge on the disposition of this equipment of $13.8 million. Concurrent with this technology upgrade, the Company upgraded certain of its data storage equipment to a more advanced architecture. As consideration for these storage systems upgrades, the Company exchanged existing data storage systems, with an aggregate net book value of $6.0 million, and paid $2.0 million cash, resulting in a one-time charge of $4.6 million. These one-time charges, aggregating $18.4 million, are recorded under Loss on disposition of data processing equipment in the accompanying Consolidated Statement of Operations for the year ended December 31, 1995.
December 31, 1995 1994 (In Thousands) Goodwill $ 61,341 $ 65,961 Customer lists 20,503 17,984 Contract acquisition costs 15,000 5,000 Covenants not to compete 5,291 2,461 Other 6,189 1,701 108,324 93,107 Less: Accumulated amortization (19,005) (15,344) Goodwill and other intangible assets, net $ 89,319 $ 77,763
Goodwill and other intangible assets with an aggregate carrying value of $5.2 million were written off as part of impairment and restructuring charges recorded during the year ended December 31, 1995 (see Note 12). Amortization charged to expense was $9.3, $8.7 and $9.3 million for the years ended December 31, 1995, 1994 and 1993, respectively.
December 31, 1995 1994 (In Thousands) Internally developed software $210,686 $154,992 Purchased software 26,265 32,305 236,951 187,297 Less: Accumulated amortization (90,969) (68,676) Capitalized software costs, net $145,982 $118,621
On August 11, 1995, the Company entered into two unsecured credit facilities of $100 million each with a syndicate of financial institutions to provide an additional source of funds for general corporate purposes. The first $100 million facility bears a term of 364 days. The second $100 million facility bears a term of 3 years. Borrowings under the facilities bear interest payable at per annum rates based upon the Morgan Guaranty Trust Company's Prime Rate, the Federal Funds Rate, the London Interbank Offering Rate or the yield on certain certificates of deposit as appropriate, plus a spread above certain of these rates ranging from .4% to .75% dependent upon certain financial ratios of the Company. Additionally, the Company pays a per annum facility fee on the aggregate amount of the commitments ranging from .1875% to .375% dependent upon certain financial ratios of the Company. The Company is subject to certain covenants including, but not limited to, the maintenance of certain operating ratios and levels of tangible net worth. The average interest rate applicable to borrowings under these credit facilities during the year ended December 31, 1995 was 6.34%.
During December 1995, as part of the restructuring of its data processing facilities (see Note 4), the Company entered into 2 and 4 year renewable lease and maintenance agreements to lease certain data processing equipment for use in its worldwide data center operations. Minimum lease payments over the initial term of the agreements aggregate $6.0 million payable in specified monthly installments. At the end of the term of each agreement, the Company has the option to purchase the leased equipment at fair market value, upgrade the equipment with the latest technology, or discontinue each lease. The Company has the guaranteed option to renew the two year lease for two more years with then current technology at not-to-exceed cost.
Future minimum lease obligations under noncancelable operating leases are stated below and include payments over 19 years aggregating $11.3 million related to a leasehold planned for future abandonment (see Note 12):
In March 1994, Security Life of Denver Insurance Company (SLD) brought suit against the Company in the United States District Court for the District of Colorado alleging breach of a life insurance joint development contract, unfair trading practices and fraud. Despite the fact that the plaintiff expressly agreed by contract to exclude from any dispute all indirect and/or consequential damages, they now assert claims for direct, indirect, consequential and punitive damages alleged to be in excess of $80 million. The Company has asserted various affirmative defenses and is vigorously pursuing a prompt resolution through all available legal processes. The Company is also vigorously pursuing counterclaims against SLD for fraud, breach of contract and failure to pay, unauthorized use of the Company's software systems, misappropriation of trade secrets, unfair trade practices, conversion of the Company's systems, unjust enrichment and fraudulent concealment. The Company is seeking in excess of $80 million against SLD. The Company is also seeking an injunction prohibiting SLD from continuing unauthorized use of certain of the Company's systems and unauthorized use of the Company's trade secrets.
In November 1993, the California State Automobile Association Inter-Insurance Bureau and the California State Automobile Association (CSAA) brought suit against the Company in the United States District Court for the Northern District of California alleging breach of contract and implied covenants of good faith and fair dealing, as well as fraud and negligent misrepresentation concerning certain early versions of systems licensed by the Company. Despite the fact that the plaintiffs contractually agreed to exclude from any dispute all indirect and/or consequential damages, they now assert claims for direct, indirect, consequential and punitive damages alleged to be in excess of $200 million. The Company has asserted various affirmative defenses and is vigorously pursuing a prompt resolution through all available legal processes. The Company is also vigorously pursuing counterclaims against the plaintiffs. The Company's claims against the plaintiffs are for breach of contract, failure to pay, and recoupment. In January of 1996, the Court considered motions for summary judgment presented by both CSAA and the Company seeking to dismiss the parties' respective claims. These motions were denied, however, the Court entered an order which limited any recovery by the Company at trial on its counterclaims to breach of contract damages and recoupment of the discounts granted to CSAA, which damages and recoupment are approximately $6 million. The jury trial of this matter commenced on March 4, 1996, and is expected to conclude in late April or early May 1996.
Also in January of 1996, the Company and Liberty Life Insurance Company each filed a complaint against the other arising from a previously disclosed contract dispute from the parties' prior contractual relationship related to the development and licensing of Series III life insurance systems and the subsequent licensing of the Company's Cybertek life insurance systems. The Company's complaint against the defendants (Liberty Life Insurance Company, the Liberty Corporation, and Liberty Insurance Services) was filed in Richland County, South Carolina, alleging breach of contract, recoupment, breach of good faith and fair dealing, breach of contract accompanied by a fraudulent act. The Company is seeking equitable relief, including preliminary and permanent injunctions, and currently an unspecified amount for actual, compensatory, and consequential damages. The Liberty Life Insurance Company's complaint against the Company was filed in Greenville County, South Carolina, alleging breach of contract, breach of express and implied warranties, fraudulent inducement, breach of contract accompanied by a fraudulent act, and recision. Liberty Life Insurance Company has alleged actual and consequential damages of approximately $30 million and also seeks treble and punitive damages. The Company has asserted various affirmative defenses and is vigorously pursuing a prompt resolution through all available legal processes.
The Company was informed by its insurer, St. Paul Mercury Insurance Company (St. Paul), that based upon the allegations raised in the SLD and CSAA lawsuits, St. Paul does not believe it would be obligated under the Company's insurance policies to reimburse defense costs or indemnify the Company for any payments relating to these claims. The Company disagrees with this conclusion and on June 20, 1995 the Company's insurer commenced a declaratory judgment action to determine the insurer's obligations related to defense costs and indemnity related to these two lawsuits. As a result of this action, the Company has filed a counterclaim against St. Paul alleging St. Paul's breach of two (2) insurance policies issued to the Company by St. Paul and breach of good faith and fair dealing by St. Paul. The Company seeks to recover the Company's defense costs in the CSAA and SLD matters, coverages for damages, if any, awarded in those matters, and consequential and punitive damages.
As a result of the action of St. Paul described above, the Company determined it was probable the Company would incur litigation expenses arising in the CSAA and SLD matters through their anticipated conclusion during 1995 of $7.9 million and provided for these expenses at June 30, 1995. The costs provided for include, but are not limited to, legal fees paid or anticipated to be paid and other costs related to the Company's claims and defenses for these matters. The Company re-evaluated its estimate of anticipated liability for expenses to be incurred in the proceedings described above due to the continuance of the CSAA and SLD trial dates into 1996, the SEC investigation continuing into 1996, and the litigation with St. Paul and Liberty. As a result of this re-evaluation, the Company determined it was necessary to increase its estimate of anticipated liability for the costs associated with these matters and at December 31, 1995, provided an additional $12.3 million for the estimated future litigation expenses arising from these matters during 1996. 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.
Year ended December 31, 1995 1994 1993 Provision for taxes at the statutory rate 35.0% (35.0)% (35.0)%
Year ended December 31, 1995 1994 1993 (In Thousands) Current taxes $ 1,451 $ (5,607) $ (7,266) Deferred income taxes relating to temporary differences: Depreciation and amortization of property, equipment and intangibles (1,748) (7,808) 3,834 Capitalized software development costs 8,876 6,555 4,914 Impairment and restructuring of operations 1,312 2,145 (12,855) Internal Revenue Service settlement - (6,000) - Revaluation of deferred state income tax liability (497) (999) - Accrued litigation settlement and expense (3,445) (1,489) - Other (1,007) 4,372 1,110 3,491 (3,224) (2,997) Total income tax provision (benefit) $ 4,942 $ (8,831) $(10,263)
An analysis of the net deferred income tax liability is as follows: December 31, 1995 1994 (In Thousands) Current deferred assets: Net operating loss carryforward $11,824 $ 411 Accrued legal fees 4,915 1,476 Foreign tax credit carryforward 2,437 - Other 5,968 4,757 Current deferred assets 25,144 6,644
Long-term deferred assets: Impairment and restructuring of operations 4,520 5,743 State tax credits 4,801 4,945 Other 3,472 1,765 Long term deferred assets 12,793 12,453 Total deferred assets $37,937 $19,097
The Company's U.S. income tax returns for the years 1985 through 1990 have been examined by the Internal Revenue Service (IRS). The Company reached a final settlement with the IRS related to all issues in the 1985 through 1990 examinations. As a result of this settlement, the Company paid $3.9 million and reduced its provision for income taxes for the year ended December 31, 1994 by $6.0 million for taxes provided in prior periods. The IRS is conducting its normal examination of the Company's consolidated federal income tax returns for the years 1991 through 1993. The Company believes that adequate amounts of federal income tax have been provided for in its consolidated financial statements for these years.
Prior to July 1, 1995, eligible employees were covered under the Policy Management Systems Corporation Profit Sharing Plan and Trust. The Company's contributions to this Plan were determined by the Board of Directors of the Company. Employees made no contributions to this Plan. The Company made no contributions to the Plan for 1995, 1994 and 1993 and on July 1, 1995, all accounts of all Participants in this Plan were merged into the Company's 401(k) Retirement Savings Plan.
The exercise price of options exercised under plans, other than under the 1993 Long-Term Incentive Plan for Executives, during the years ended December 31, 1995, 1994 and 1993, were $15.13 to $49.63. The exercise prices of shares under option at December 31, 1995, 1994 and 1993, other than under the 1993 Long-Term Incentive Plan for Executives, were $15.13 to $69.38.
Options granted in 1993 under the 1993 Long-Term Incentive Plan for Executives have exercise rights at 105% of market value at the date of grant. All of these options have an exercise price of $81.90. (For individuals who were or may be selected later to participate in the 1993 Long-Term Incentive Plan for Executives or for additional options which were granted or may be granted to participants due to promotions, said percentage is based on the year the individual was or may be selected or promoted as follows: 1993 - 105%; 1994 - 104%; 1995 - 103%; 1996 - 102%; 1997 - 101%; and 1998 - 100%.) Options granted under the plan in 1993 become exercisable as follows: 25% on January 1, 1995; 25% on January 1, 1997; and 50% on January 1, 1999. For individuals who were selected or may be selected to participate in the plan and for additional options which were granted or may be granted to participants due to promotions, the number of options granted and what percentage becomes exercisable on the above dates are determined according to formulas described in the plan.
On June 30, 1995, the Company sold its Health Insurance Systems Division for a total consideration of $9.3 million in cash. After selling expenses of $.5 million, the net book value of assets sold of $.5 million, liabilities resulting from the sale, including severance liabilities for certain employees and other reserves of $1.5 million, and the present value of a sublease executed by the purchaser for certain office space of $1.3 million, the Company recorded a pre-tax gain of $8.1 million, which has been recorded under "Costs and Expenses" in the Consolidated Statements of Operations for the year ended December 31, 1995.
During 1995, the Company continued to examine its options to improve the overall performance of the risk information services business. Options considered by the Company regarding this business included price increases, outsourcing arrangements with other providers, automation of its field force and a continued consolidation of field offices. The price increases and the consolidation of its field offices, implemented during the first and second quarters of 1995, did reduce the Company's operating losses by the third quarter of 1995, but not significantly. Additionally, the Company was not successful in its efforts to outsource the business, because major vendors in the market provided database information to insurance companies and were not interested in performing data collection services. The Company determined automating the field force was not economically justified. The risk information services business continued to reflect declining sales and earnings, reporting revenues of $22.7 million for the year ended December 31, 1995 and an operating loss of $4.2 million.
During 1995, the Company ceased the active marketing of certain processing software utilized in the processing of Individual Accident and Health business by the Company's life business. Revenue growth for this product, if any, is expected to come from existing clients adding policy volume through traditional new business sales or by the acquisition of new, multi-policy blocks of business, however, the existing customer base is expected to ultimately decrease as processing contracts expire. A discounted cash flow valuation performed by the Company under the above assumptions indicated that the expected discounted future cash flows of this business do not entirely support the carrying value of the goodwill associated with this business, which was originally acquired in 1987. As a result, the Company recorded at December 31, 1995 impairment charges of $.9 million to write-down the carrying value of the related goodwill to its estimated net realizable value.
The Company operates in one business segment, providing insurance software systems and providing automation and administrative support and information services to the worldwide insurance industry. Less than ten percent of the Company's revenues from unaffiliated customers are generated from exports, and no one customer accounted for more than ten percent of total consolidated revenues during the year ended December 31, 1995.
The Company operates in several geographical areas worldwide. A summary of the Company's operations by area follows:
Year Ended December 31, 1995 1994 (In Thousands) Net revenues: United States $453,530 $445,462 International 113,867 65,049 Eliminations (30,095) (17,805)
Income (loss) before income taxes (benefit): United States $ 3,333 $(15,189) International 3,087 (2,026) Eliminations 1,661 (1,274) Total income (loss) before income taxes (benefit) $ 8,081 $(18,489)
Identifiable assets: United States $516,602 $491,768 International 120,081 59,935 Eliminations (59,609) (27,672)
Concentration of credit risk with respect to trade accounts receivable is generally diversified due to the large number of entities comprising the Company's customer base across the insurance industry. The Company performs ongoing credit evaluations on certain of its customers' financial condition, but generally does not require collateral to support customer receivables. The Company establishes an allowance for uncollectible accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
Our report on the consolidated financial statements of Policy Management Systems Corporation and subsidiaries, is included on page 30 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 29 of this Form 10-K.