The following table sets forth certain information with respect to the principal facilities used in the Company's operations, all of which are leased:
(1) The Company anticipates entering into a new ten-year lease for approximately 96,000 square feet at this location effective on or about May 1, 1998.
The aggregate monthly lease rate for the properties listed above is $86,800. The Company also leases approximately 5,600 square feet in Westborough, Massachusetts at $6,000 per month under a lease expiring in December 1998, which the Company subleases to a subtenant at substantially the same monthly lease rate under a sublease expiring in December 1998.
The Company believes that, subject to the contemplated expansions of facilities noted above, its existing facilities are adequate to meet the Company's requirements for the foreseeable future.
The selected financial data of the Company presented below as of December 31, 1997, 1996 and 1995, and for the years ended December 31, 1997 and 1996 and the period April 28, 1995 through December 31, 1995 have been derived from the audited financial statements of the Company. The selected financial data should be read in conjunction with "
Sale of Subsidiary. On September 15, 1997, the Company sold AQS for $2.5 million to Samuel J. Fleager, the former principal shareholder of AQS. The sale resulted in a gain of $1.6 million, which is included in other income in the Company's consolidated statements of operations for the year ended December 31, 1997. AQS sells the Applied Quoting Systems Module ("AQSM"), a DOS-based commercial lines policy administration system. AQSM automates commercial policy rating, issuance, renewals and mid-term policy changes. AQS total revenues were $3.4 million for the period January 1, 1997 through September 15, 1997 and $4.1 million for the year ended December 31, 1996. On October 29, 1997, the Company entered into a five-year agreement with Cover-All to license Cover-All's commercial lines rating, policy issue and forms solutions for use in the Company's software products and services offerings. The Company calls this new product "ValueRate" and is currently integrating it with PCA and WPC.
Cost of Revenues. Total cost of revenues was $33.9 million for the year ended December 31, 1997 compared to $10.5 million for the year ended December 31, 1996, an increase of $23.4 million or 223%, primarily as a result of (i) the SDS Acquisition and (ii) the costs associated with the performance of services under the three significant outsourcing contracts described above. Cost of revenues as a percentage of total revenues decreased to 60% for the year ended December 31, 1997 from 77% for the year ended December 31, 1996. This decrease was primarily a result of economies of scale associated with spreading certain fixed costs over a larger revenue base and lower personnel and equipment costs as a percentage of revenues.
primarily due to (i) the SDS Acquisition and (ii) additional staffing, office space and computer equipment and software required to expand the infrastructure to support the Company's growth. Selling, general and administrative expenses as a percentage of total revenues decreased to 18% for the year ended December 31, 1997 from 23% for the year ended December 31, 1996. This decrease was primarily a result of economies of scale associated with spreading certain fixed costs over a larger revenue base and lower personnel and equipment costs as a percentage of revenues.
Nonrecurring Expenses. In the purchase price allocation of the SDS Acquisition, $3.0 million was assigned to in-process research and development. This amount was charged to operations in March 1997. In addition, $3.9 million was charged to operations as deferred compensation associated with stock options granted to executive officers during 1997.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1995 ON A HISTORICAL BASIS
Depreciation and Amortization. Depreciation and amortization expense was $787,000 for the year ended December 31, 1996 compared to $33,000 for the period from inception through December 31, 1995, an increase of $754,000 or 2,285%. This increase is primarily attributable to Miller Mutual's capital contribution of approximately $2.4 million in depreciable property and equipment during the last six months of 1995 and the purchase of approximately $1.8 million in depreciable property and equipment during 1996.
Historically, the Company funded its operations through cash generated from operations, as well as borrowings and capital contributions from Millers Mutual. In August 1997, the Company completed its initial public offering. Net cash provided by (used in) operating activities was $4.5 million for the year ended December 31, 1997 compared to ($459,000) for the year ended December 31, 1996. In 1997, cash flow used in operating activities included an increase in accounts receivable of approximately $5.7 million and a decrease in deferred income taxes of approximately $2.4 million, which was offset by depreciation and amortization expense of approximately $4.0 million, purchased research and development expense of $3.0 million and deferred compensation expense of $4.0 million and an increase in income taxes payable of $2.8 million. Net cash used in investing activities was $19.1 million for the year ended December 31, 1997, primarily attributable to the SDS Acquisition, compared to $1.7 million for the year ended December 31, 1996. Net cash provided by financing activities was $42.3 million for the year ended December 31, 1997, primarily due to the Company's initial public offering, compared to $2.5 million for the year ended December 31, 1996.
The Company entered into the NationsBank Facility on March 12, 1997, pursuant to which the Company borrowed $5.0 million under a term credit facility and $2.5 million under a $4.0 million revolving credit facility, subject to a borrowing base formula, to finance in part the SDS Acquisition. Although the Company used a portion of the net proceeds of the Company's initial public offering to repay these amounts, the Company intends to keep the revolving credit facility in place for future borrowings. The Company must pay a commitment fee of 0.25% per annum on the average daily unused portion of the revolving credit facility. In addition, the NationsBank Facility contains certain restrictive covenants that require the Company to meet certain requirements, such as maintaining a minimum net worth, and that, without the prior written consent of NationsBank, prohibit the Company from incurring indebtedness other than pursuant to the NationsBank Facility or declaring or paying dividends or other distributions. The revolving credit facility matures on March 12, 1999. Borrowings under the NationsBank Facility are secured by all accounts receivable, inventory, equipment, servicing contract rights, and other personal property of the Company. At December 31, 1997, there were no outstanding borrowings under the NationsBank Facility, and the Company is currently in compliance with its covenants under the NationsBank Facility.
In October 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position No. 97-2, Software Revenue Recognition ("SOP 97-2"). SOP 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997. The Company believes the adoption of SOP 97-2 statement will not have a material effect on the Company's financial position or results of operations.
The following table sets forth certain unaudited historical quarterly financial data for each of the eight consecutive quarters in fiscal 1997 and 1996. This information is derived from unaudited financial statements that include, in the opinion of the Company, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation when read in conjunction with the financial statements of the Company and notes thereto included elsewhere in this annual report on Form 10-K.
(3) Represents $3.9 million of deferred compensation expense relating to the grant of stock options to executive officers.