The Company, through its data centers located in North America, Europe and Australia, utilizes 16 mid-range and mainframe computers. All computers are owned or held under long-term leases. In total, these computers have 7,464 megabytes of memory and are capable of processing approximately 772.2 million instructions per second. The Company is currently utilizing 70% to 90% of this capacity.
Initial license revenues for 1994 increased $11.6 million (43.8%) compared to 1993. The increase is principally related to new systems licensed by life insurers ($10.4 million) and to an expanded license agreement with a large Blue Cross Blue Shield organization and other licensing activities in the health insurance systems business ($6.5 million). Increased system licensing in the life insurance market reflects growing customer interest in the Company's CK/4 Enterprise and impending release of CYBERLife software system solutions. These system solutions incorporate and capitalize on the capabilities of software products acquired in the acquisition of CYBERTEK Corporation in August 1993 and components of the Company's Series III technology. The Company does not expect to see recurring transactions such as the large Blue Cross Blue Shield license expansion ($5.9 million) in the near term as health insurers, for the most part, are still reluctant to make major systems decisions. The increase in initial license revenues, experienced by the life and health insurance systems businesses, was partially offset by a reduction in system licensing revenues from property and casualty insurers. Although down $5.3 million (20.1%) for the year, property and casualty initial licensing revenues increased $7.4 million (135.3%) for the combined third and fourth quarters of 1994, compared to the corresponding period in 1993. This increase reflects growing customer acceptance of the Company's integrated client/server technology available in Series III and the Company's POINT system, which is typically marketed to small- to medium-sized insurers. Larger insurers also licensed POINT for their specialized niche markets and subsidiary companies.
Initial license revenues for 1993 decreased $1.0 million (3.6%) compared to 1992. This decrease was due principally to a decrease in both the life ($5.3 million) and health ($5.0 million) insurance systems businesses. The decrease in licensing revenues attributable to the life business arose from the Company's decision to develop new releases of certain of its life systems based on the business functions of CYBERTEK software rather than to continue licensing the Company's existing life products. The Company's development work on new releases began in September 1993 and the Company began making new releases of its CK/4 Enterprise systems generally available in the second quarter of 1994. The Company believes the decline in licensing revenues attributable to the health business was directly related to the uncertainty created by the national debate over proposals to restructure the country's healthcare system and the unwillingness of insurers to make commitments for any significant new enterprise-wide systems, while the move from indemnity to managed care products is rapidly evolving. These decreases were partially offset by an increase in initial license revenues related to the property and casualty insurance business of $9.3 million. A significant portion of property and casualty licensing activity occurred during the first half of 1993. Subsequent to April 1993, the Company believes the property and casualty licensing activity was negatively affected by the Company's special audit and related activities, which were not concluded until February 1994. Subsequent to April 1994, when the Company announced its third and fourth quarter and annual 1993 operating results, property and casualty licensing revenues began to reflect a more traditional level of activity.
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 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 in the health insurance systems business.
Monthly license revenues for 1993 increased $2.7 million (5.9%) compared to 1992. This increase is principally related to an increase of $2.1 million attributable to licenses acquired as part of the acquisition of CYBERTEK Corporation and to $.6 million related to the health insurance systems business. Monthly license revenues related to property and casualty business remained relatively unchanged due principally to the decline in licensing activity during the second half of 1993, as stated above.
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.
Professional and outsourcing services revenues for 1993 decreased $73.4 million (28.6%) compared to 1992. The decrease was principally related to a decline in services provided by the Company's health insurance systems business and to the wind-down of the MTF project. Prior to the wind-down of the MTF, annual MTF revenues in 1992 were $68.4 million. The Company believes the decline in health revenues was directly related to the significant restructuring proposals discussed above. For a more detailed discussion of the effects of healthcare reform, see Costs and Expenses below.
Information services revenues for 1994 increased $1.3 million (.7%) compared to 1993. This increase is principally related to $2.5 million of life information services (principally attending physician statements and personal medical history interviews), which was partially offset by a reduction in revenues associated with the Company's property and casualty risk information services business.
The Company believes that decreases associated with the Company's domestic property and casualty automobile and risk information services business, described above, relate principally to significant changes in the property and casualty insurance industry. As a result of the catastrophic losses arising from several natural disasters in 1992 and 1993, insurers have experienced significant underwriting margin erosion. In some cases, insurance companies were forced to discontinue writing business in certain high-risk areas and in general have reduced new business activity. Consequently, the demand for information services has declined, intensifying competition
Although employee compensation and benefits remained relatively unchanged from 1992 to 1993, the Company did experience a reduction in compensation and other benefits resulting from the downsizing in the Company's health insurance systems staff, which was partially offset by costs associated with the acquisition of CYBERTEK Corporation in August 1993.
The Company recorded certain impairment and restructuring charges/credits 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 Company, as a result of significant changes in the property and casualty insurance industry (see Revenues above), experienced a $5.1 million operating loss (before interest and income taxes) in its property and casualty domestic automobile and risk information services business in 1994. Revenues associated with this business amounted to $128.9 and $133.0 million for 1994 and 1993, respectively. Although the Company took actions during 1994 to improve the overall performance of this business, such as implementing management changes, realignment and consolidation of field offices, and refining and enhancing current product offerings, this business continued to reflect declining sales and earnings, with the loss of business from key customers. (For a further discussion see Revenues above.)
The Company decided that 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 systems would be replaced by software that is being and has been developed in conjunction with its future strategic direction. As a result of its evaluation, the Company determined that no write-down of the software is 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.
The Company established reserves of $2.0 million at December 31, 1994, in connection with the acquisition of Creative Group Holdings, Limited ("Creative"), to provide for the costs of terminating the Company's existing lease obligations in the United Kingdom and relocation and severance costs associated with consolidating its existing operations. The Company also expensed $2.6 million of purchased research and development, related to the Creative acquisition, at December 31, 1994 (see Note 2 of Notes to Consolidated Financial Statements).
purchased research and development costs arising out of the Company's acquisition of Creative in December 1994 ($2.6 million) and charges related to settling the Company's securities class action ($34.2 million). The special charges in 1993 of $98.8 million relate to impairment and restructuring charges of $80.7 million and $18.1 million related to the June, 1993 special charge discussed above.
Operating income, excluding impairment and restructuring charges and other special charges described above, amounted to $52.2 and $21.7 million for 1994 and 1993, respectively, compared to $79.0 million in 1992. As a percentage of revenues, operating income, excluding special charges, increased to 10.6% for 1994 from 4.8% for 1993, down from 16.1% in 1992.
Initial license revenues.... 25.4% 23.9% 16.3% 34.4% 100.0% Total revenues.............. 5.9% 5.4% 3.6% 7.5% 5.6%
During 1994, the Company's life insurance systems business benefited from an increase of $14.8 million in licensing revenues and $24.4 million in professional and outsourcing services, which includes the results of CYBERTEK. The Company's decision to develop new releases of certain of its life systems based on the business functions of CYBERTEK software and the process of integrating CYBERTEK functionality into certain existing Series III applications, had the effect of significantly reducing revenues and operating income from the life insurance services business in the short-term.
Investment income decreased $3.8 million for 1994 compared with 1993, as a result of a lower level of investable funds, resulting from large cash expenditures for the acquisition of CYBERTEK Corporation ($59.7 million) in August 1993, the repurchase in April 1993 of 970,668 shares of the Company's common stock ($48.7 million), the repurchase in May 1994 of 2,278,537 of the 3,797,561 shares of common stock held by IBM ($56.6 million), the repurchase of 995,500 shares of the Company's outstanding common stock on the open market ($35.3 million) under its 2.5 million share repurchase authorization, and to a decrease in interest income related to long-term accounts receivable. Investment income decreased $2.2 million for 1993 compared to 1992, as a result of a lower level of investable funds, resulting from large cash expenditures in 1993.
Interest expense and other charges increased $1.3 million for 1993 compared to 1992, primarily as a result of the amortization of discounts associated with long-term restructuring liabilities recorded in 1993.
Cash provided by operations was $59.9 million for the year ended December 31, 1994, compared with $80.8 million and $107.8 million for the years ended December 31, 1993 and 1992, respectively. The lower cash flow from operations in 1994 was principally the result of the payments to settle the shareholder class action and related expenses ($29.4 million) and payment of restructuring liabilities described in greater detail below. Before the effect of these items cash flow from operations would have been greater for 1994 than 1993. Cash flow from operations was greater in 1992 than either 1994 or 1993 principally because of the higher levels of net income as discussed in greater detail in preceding sections of this analysis.
Excluding short-term investments, net cash used by investing activities amounted to $79.4 million for 1994. During 1994, net cash used for investments included $24.8 million that was invested in data processing and communications equipment, support software and office furniture and equipment. Amounts capitalized for internal software development increased to $30.7 million for 1994 compared to $24.7 million for the corresponding period in 1993, due primarily to the development of life software systems based on the business functions of CYBERTEK software and the process of integrating CYBERTEK software functionality with certain existing Series III applications.
Significant expenditures anticipated for 1995, excluding any possible business acquisitions and stock repurchases, are as follows: acquisition of data processing and communications equipment, support software, building improvements and office furniture, fixtures and equipment ($10.0 million); costs relating to the internal development of software systems ($33.0 million); and payments relating to past business acquisitions ($6.3 million).
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. 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.
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1994, 1993 and 1992................... 28
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992....... 29
Supplemental schedules other than those listed above are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or in the notes thereto.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 8 to the consolidated financial statements, the Company is presently involved in litigation and investigations into possible security law violations. The ultimate outcome of these matters cannot presently be determined. Accordingly, no provision for liability, if any, that may result from these uncertainties has been made in the consolidated financial statements.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Policy Management Systems Corporation and subsidiaries as of December 31, 1994 and 1993 and the results of their operations and their cash flows for the years ended December 31, 1994, 1993 and 1992 in conformity with generally accepted accounting principles.
The Company provides professional support services, including systems implementation and integration assistance, consulting and educational services, which are available under services agreements and charged for separately. These services are generally provided under time and material contracts and in some circumstances under fixed price arrangements. Under fixed price contracts, revenue is recognized on the basis of the estimated percentage of completion of service provided using the cost-to- cost method. Changes in estimates to complete and losses, if any, are recognized in the period in which they are determined. The Company does from time to time enter into certain joint development arrangements. Although these arrangements are varied, the Company principally will undertake custom development of a product or enhancement and typically retain all marketing rights and titles to such development. The Company does, however, have certain joint marketing arrangements. Joint development arrangements are generally provided for under fixed price agreements and in some circumstances on a time and material basis. The Company recognizes revenue on the same basis as professional support services; however, where technological feasibility has already been established, the Company will capitalize the portion of development costs which exceed customer funding provided under the joint development arrangement.
The Company also offers information and outsourcing services ranging from making available software licensed from the Company on a remote processing basis from the Company's data centers, to complete systems management, processing, administrative support and automated information services through the Company's nationwide telecommunications network using the Company's data base products. Outsourcing services are typically provided under contracts having terms from three to ten years, while agreements to provide information services have terms from one to five years, and in some cases month-to-month. Revenues from substantially all outsourcing and information services are recognized at the time the service is performed and losses, if any, are recognized in the period in which they are determined.
internally developed software primarily include direct and indirect costs associated with payroll, computer time and allocable depreciation and other direct allocable costs, among others. All costs incurred prior to the establishment of technological feasibility have been expensed as research and development costs during the periods in which they were incurred and amounted to $2.5, $2.7 and $13.3 million for the years ended December 31, 1994, 1993 and 1992, respectively. The amount by which unamortized software costs exceeds the net realizable value, if any, is recognized in the period it is determined.
Foreign Currency Translation The local currencies of the Company's foreign subsidiaries have been determined to be the functional currencies. Assets and liabilities of foreign subsidiaries are translated into United States dollars at current exchange rates and resulting translation adjustments are included as a separate component of stockholders' equity. Revenue and expense accounts of these operations are translated at average exchange rates prevailing during the year. Transaction gains and losses, which were not material, are included in the results of operations of the period in which they occur.
On December 31, 1994, the Company acquired all of the outstanding capital stock of Creative Group Holdings, Limited (Creative) for an aggregate consideration of $19.6 million. Creative, headquartered in the United Kingdom, is a British holding company whose wholly-owned subsidiaries provide software consulting, development, licensing and financing services to medium-sized general insurance companies. Creative currently has offices in England, Australia and Southeast Asia.
The acquistion has been recorded using the purchase method of accounting. Accordingly, the Consolidated Statement of Operations of the Company for the year ended December 31, 1994 does not include the results of operations of Creative for the period. The consolidated balance sheet as of December 31, 1994 includes the assets and liabilities acquired as of that date. In connection with the acquisition, the Company recorded an estimated liability of $2.0 million at December 31, 1994, to provide for the costs of terminating the Company's existing lease obligations in the United Kingdom ($1.8 million) and relocation and severance costs of consolidating its existing operations in the United Kingdom with Creative ($.2 million). These costs are included in Impairment and restructuring charges, net in the accompanying Consolidated Statements of Operations. At December 31, 1994, the Company also recorded a write-off of $2.6 million of the purchase price of Creative as purchased research and development. The total cost of the acquisition was determined, and assigned to the assets acquired, as follows:
(In Thousands) Total consideration paid........................... $19,634 Direct costs of acquisition........................ 304 Total cost to be assigned to net assets acquired... 19,938 Add - Liabilities assumed......................... 8,789 Less - Cost assigned to tangible and identifiable intangible assets acquired (including $1,572 purchased software cost).................... 15,560 Less - Write-off of purchased research and development............................. 2,551 Cost assigned to goodwill.......................... $10,616
In August 1993, the Company consummated the acquistion of all of the outstanding stock of CYBERTEK Corporation (CYBERTEK), a computer software development, services and processing company. The acquisition was recorded using the purchase method of accounting and, of the total $59.7 million cost to acquire CYBERTEK, $26.3 million was assigned to goodwill.
Supplemental pro-forma information is not presented since these acquisitions were not material.
In accordance with this statement, 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. As of 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 loss on available-for-sale securities for the year ended December 31, 1994, included as a component of shareholder's equity is $.1 million. There were no sales or transfers of debt securities out of the held-to-maturity category during the year ended December 31, 1994.
As of December 31, 1993, the amortized cost of the Company's marketable securities was $132.6 million, with a market value of $135.0 million.
December 31, 1994 1993 (In Thousands) Internally developed software........ $154,992 $124,326 Purchased software................... 32,305 47,655 187,297 171,981 Less: Accumulated amortization....... (68,676) (54,468) Capitalized software costs........... $118,621 $117,513
During the fourth quarter of 1994, the Company entered into an unsecured line of credit agreement with a bank for the purpose of supporting temporary working capital needs. The rate of interest to be charged on borrowings under this facility is the 90-day London Interbank Bid Offer Rate (LIBOR) plus one percent. The interest rate is adjusted at 90-day intervals and accrued interest is payable monthly. The maximum amount which may be outstanding under the agreement is $30 million, which matures with unpaid accrued interest on January 15, 1996. The Company paid a non-refundable commitment fee of .10 percent of the $30 million line of credit and pays a fee of .15 percent per annum quarterly on the average unused portion thereof. There were no borrowings outstanding under the line of credit as of December 31, 1994.
$4.3 and $4.3 million for the years ended December 31, 1994, 1993 and 1992, respectively. Future minimum lease obligations under noncancelable operating leases are stated below and include payments over 20 years aggregating $16.8 million related to a leasehold planned for future abandonment (see Note 12):
As previously disclosed, the Company did not meet its earnings plan for the first quarter of 1993, due principally to the deterioration in the Company's health insurance systems business. Following this announcement, the Company's stock price dropped by over 40% and, within 24 hours, litigation was commenced in the United States District Court for the District of South Carolina against the Company and certain of its present and former officers and directors in the form of a class action on behalf of purchasers of the Company's common stock between March 18, 1992, and ultimately, July 8, 1993. The lawsuit alleged that, among other things, the Company had failed to prepare its financial statements in accordance with generally accepted accounting principles and omitted to disclose certain information in violation of federal securities laws.
In December 1994, the Company reached an agreement, subject to court approval, to settle the shareholder class action. The settlement of $31 million will be 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) which has been recognized as an expense in the accompanying Consolidated Statement of Operations for the year ended December 31, 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 addition to the litigation described above, the Company is presently involved in litigation arising out of the Company's change in the direction of its future life software systems development following the acquisition of CYBERTEK and an early version of its Series III software. There are also various other litigation proceedings and claims arising in the ordinary
Increase (decrease) in provision from: Goodwill amortization................ 6.5 % 22.9 % 1.2 % Goodwill impairment.................. 18.6 % - - Internal Revenue Service settlement......................... (32.5)% - - Revaluation of deferred state income tax liability............... (5.4)% - - Purchased research and development........................ 4.8 % - - Nontaxable investment income......... (6.7)% (3.6)% (3.7)% State and local income taxes, net of federal tax effect.......... (0.2)% (1.4)% 0.5 % Increase in statutory rate........... - 1.6 % - Other................................ 2.1 % - 0.2 % (12.8)% 19.5 % (1.8)% Effective income tax................... provision (benefit) rate............. (47.8)% (15.5)% 32.2 %
Year ended December 31, 1994 1993 1992 (In Thousands) Current taxes....................... $(5,607) $ (7,266) $27,063 Deferred income taxes relating to temporary differences: Depreciation and amortization of property, equipment and intangibles................... (7,808) 3,834 (1,907) Capitalized internal software development costs............. 6,481 4,914 4,458 Impairment and restructuring of operations.................... 2,145 (12,855) - Internal Revenue Service settlement.................... (6,000) - - Revaluation of deferred state income tax liability.......... (999) - - Other........................... 2,957 1,110 (373) (3,224) (2,997) 2,178 Total income tax provision (benefit)........... $(8,831) $(10,263) $29,241
The Company generated a $14.5 million net operating loss for the year ended December 31, 1994 for tax purposes. This loss, which is anticipated to be carried forward, will expire in 2009. Additionally, the Company has loss carryforwards of $1.1 million at December 31, 1994 related to a business acquisition in 1991. The acquired loss carryforwards are subject to a $.4 million annual limitation and will expire in 2002. The entire benefit related to the Company's loss carryforwards has been recognized in the consolidated financial statements.
Retirement Savings Plan The Company offers a 401(k) retirement savings plan for eligible employees. During 1994, Participants could elect to have up to 10% of their salary withheld, on either a before-tax or an after- tax basis, or a combination of both for investment in the program. The Company would make a matching contribution of 50% for the first 6% of salary contributed by the Participant on either a before-tax or an after-tax basis as the Participant elected, but not to both. Beginning in 1995, the Company will make a matching contribution of 100% of the first 3% of salary contributed by the Participant and also a matching contribution of 50% of the next 3% of salary contributed by the Participant. Participants may also make limited additional contributions which are not subject to matching contributions by the Company. Participants have several options as to how their contributions may be invested, but through October 1993, all matching contributions had been invested in common stock of the Company. Company contributions made after October 1993 were, and continue to be, invested in a government money market fund, except as Participants may otherwise redirect such Company contributions previously made. The Company's contribution on behalf of participating employees was $2.2, $1.9, and $1.9 million for the years ended December 31, 1994, 1993 and 1992, respectively.
Stock Option Plans The Company has various plans under which options to purchase shares of the Company's common stock have been granted to eligible employees and members of the Board of Directors of the Company. In 1992, options were granted under the 1989 Stock Option Plan to eligible employees and members of the Board of Directors, subject to approval by the Company's stockholders of an amendment to increase the number of shares available for grant under that plan. In January 1993, options were also granted under the Company's 1993 Long-Term Incentive Plan for Executives, subject to approval by the Company's stockholders. At the annual meeting of the Company's stockholders in April 1993, the amendment to the 1989 Stock Option Plan and the 1993 Long-Term Incentive Plan for Executives were approved.
Year Ended December 31, 1994 1993 1992 Shares under option at beginning of year............ 1,725,119 1,202,856 1,295,297 Granted......................... 1,361,143 592,500 396,300 Exercised....................... - (21,777) (469,483) Forfeited....................... (281,934) (48,460) (19,258) Shares under option at end of year................... 2,804,328 1,725,119 1,202,856
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, 1994, 1993 and 1992, were $15.13 to $49.63 and the exercise prices of shares under option at December 31, 1994, 1993 and 1992, other than under the 1993 Long-Term Incentive Plan for Executives, were $15.13 to $69.38.
All options granted under plans, other than those granted under the 1993 Long-Term Incentive Plan for Executives, have exercise prices at 100% of market value at date of grant and other than the October 1994 grant to the executives are exercisable at the rate of 33 1/3% per year (cumulative) beginning one year from date of grant. The options granted in October to the senior executives are exercisable at the rate of 33 1/3% per year (cumulative) beginning three years from the date of grant. Options granted in 1993 under the 1993 Long-Term Incentive Plan for Executives have been granted at 105% of market value at the date of grant; all 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 or 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.
The Company announced on April 27, 1994, that it had agreed with IBM to repurchase 2,278,537 of the 3,797,561 shares of the Company's common stock held by IBM and that the remainder of the Company's shares owned by IBM would be purchased by the General Atlantic Partners group, a New York-based private investment firm. The Company completed the repurchase of these shares on May 16, 1994, at a share price of $24.71, which approximated an aggregate cash expenditure of $56.6 million. The shares repurchased by the Company represent 10% of its total shares outstanding prior to the repurchase.
The Company, as a result of significant changes in the property and casualty insurance industry, experienced a $5.1 million operating loss (before interest and income taxes) in its property and casualty domestic automobile and risk information services business in 1994. Revenues associated with this business amounted to $128.9 and $133.0 million for 1994 and 1993, respectively. Although the Company took actions during 1994 to improve the overall performance of this business, such as implementing management changes, realignment and consolidation of field offices, and refining and enhancing current product offerings, this business continued to reflect declining sales and earnings, with the loss of key customers. The Company determined that there was a trend towards reduced sales and acceptance of new business in the industry as a result of five years of major catastrophic losses. The Company believes that this industry is reacting to these catastrophic losses by focusing on risk concentration and in many cases making deliberate decisions to discontinue writing business in certain high risk areas, and some insurers ceased doing business or withdrew from certain states. This combination of factors could result in a continued decline in demand for certain information services. Although the Company consolidated its branch network offices to lower its fixed costs, this did not offset the increasing variable costs incurred due to the geographic dispersion of the Company's customer base. As competition has increased, leading to intense price competition among information providers, the Company's competitors, through package pricing, are offering certain competing products to the market below the Company's cost.
Expected future cash flows for this business are based on the current level of operating loss continuing in the near-term with only a modest recovery over the long-term principally because the Company expects the negative impact of the insurance industry market environment to continue into the future. Consequently, at the end of the forecast period, a residual was included based on an estimate of liquidation value. The Company used a discount rate of 18% which reflects its weighted average cost of capital, which includes a factor for equity commensurate with the risk associated with the information services business. This rate was determined using the Capital Asset Pricing Model which reflects the return the Company should achieve on its investment.
The Company decided that 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 would be replaced by software that is being and has been developed in conjunction with its future strategic direction. As a result of its evaluation, the Company determined that no write-down of the software is 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.
Due to a decision by one of the Company's property and casualty insurance customers not to license software acquired by the Company for integration into its property and casualty software systems and the Company's decision not to market or license such software, the Company recorded impairment charges of $1.9 million to write-off the carrying value of such software.
During the fourth quarter of 1994, the Company decided it would no longer market or license its Agency Workstation System ("AWS"), an automated insurance agency sales and marketing software system, acquired from Agency Automation Partners Limited. As more of the Company's customers have become operational on Series III and plan the full implementation of Series III functions, the Company changed its strategy for integrated system solutions between the insurance company and its agents (or independent agents) or direct marketers. As a result, the Company will change its dependency on AWS and integrate new agency software system tools with its Series III functions. Consequently, the Company recorded impairment charges of $8.1 million to write-off the carrying value of AWS.
Since June 30, 1993, the Company has continued to downsize its health staff from 437 to 220 at the end of 1994. Compensation and other benefits decreased $7.8 million for 1994 as a result of downsizing from 388 at the end of 1993. The Company has not completed its downsizing as originally anticipated due principally to contractual services provided to certain customers. As services obligations are completed, downsizing will continue as planned.
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 to 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, 1994. The Company operates in several geographical areas worldwide. A summary of the Company's operations by area follows (in thousands): Year ended December 31, Net revenues 1994 United States............................... $445,462 International............................... 65,049 Eliminations................................ (17,805) Total net revenues....................... $492,706
Identifiable assets United States............................... $491,768 International............................... 59,935 Eliminations................................ (27,672) Total identifiable assets................ $524,031
Our report on the consolidated financial statements of Policy Management Systems Corporation, which contains an emphasis paragraph related to ongoing litigation and investigations into possbile security law violations, is included on page 25 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 24 of this Form 10-K.