In addition, the Company also leases a facility with approximately 22,000 square feet in Somerset, New Jersey. This lease expires in 2002 with an annual rental expense of approximately $270,000. This facility was previously used by ISD, however the Company anticipates utilizing this facility to house a significant number of new employees that will be working on a joint project with a new customer.
Two Year Year Months Ended Ended Ended December December December 31, 1995 31, 1994 31, 1993 --------- --------- --------
Loss on disposal of discontinued operations including $1,000 for losses in 1996 prior to sale, no tax benefit provided (750)
Years Ended October 31, --------------------------------- 1993 1992 1991 ---- ---- ----
During the years 1993 through 1995, the Company derived most of its revenues from providing full service automobile insurance services (policy processing, policy administration and claims administration) through its ISD business. The Company has also provided state-of-the-art computer products for the property casualty insurance industry through its wholly-owned subsidiary, COVER-ALL.
Revenues earned under the contract with Clarendon involved full service policy administration and claims services for approximately 18 percent of the assigned risk drivers in New Jersey. This activity started in 1993 with the commencement of the New Jersey Personal Automobile Insurance Plan ("PAIP") following the end of New Jersey's direct insurance program provided by its MTF. Warner's service for Clarendon was performed under New Jersey's Limited Assignment Distribution Program ("LAD") which required that servicing carriers such as Warner bear some of the underlying insurance risk of the policies being handled. For this reason, Warner formed a wholly-owned insurance subsidiary, Alerion, and effective January 1, 1994, Alerion reinsured a portion of Clarendon's insurance risk under the PAIP program.
Most of Warner's insurance services contracts included a variable fee structure based on the loss ratios of the underlying insurance policies which could increase or decrease fee revenues. The Company obtained periodic independent actuarial evaluations of the loss ratios for these programs and adjusted the amount of its revenue when required. Subsequent to December 31, 1994, the Company obtained independent actuarial projections of loss adjustment expenses expected to be incurred in 1995 and beyond with respect to the Company's contractual obligations under its insurance services contracts. As a result of this review, the Company determined that its deferred contract revenues at the end of 1994 should be increased by $4.1 million to adequately cover contract costs and profit margins in 1995 and beyond. This change in accounting estimate was recorded in the fourth quarter of 1994 as a reduction of insurance services revenue.
As a result of the above, ISD was suffering losses and was operating under considerable uncertainty because of the pendency of lawsuits with certain affiliates of The Robert Plan Corporation, a customer and subcontractor for the Company. In March 1996, the Company entered into a series of agreements resulting in the settlement and dismissal of the lawsuits and the release of the Company from continuing obligations under contracts for the provision of insurance services to ISD customers. See Note 1 to the Consolidated Financial Statements for a discussion of the various financial elements of those agreements. In essence, the Company no longer offers full service automobile insurance services, and its ISD operations have been transferred to a subsidiary of The Robert Plan Corporation which has replaced the Company as a service provider to such customers. These agreements have resulted in a net loss for 1995 of approximately $750,000, which includes a provision for estimated ISD losses in 1996 prior to the March 1 effective date of the Restructuring.
Total revenues from software licensing were $4,118,754 for the year ended December 31, 1995 as compared with $1,926,822 for the year ended December 31, 1994, reflecting increasing progress on initial installations of TAS 2000 and increased fee arrangements for professional support to most customers.
In December 1994, management adopted a plan to reduce the COVER-ALL marketing and product development costs until revenues increased to significantly higher levels. The total cash outlay had grown to a level of approximately $1 million per month but the revenues from customers continued to lag expectations. The total head count, including employees and technical consultants, was reduced by approximately half in the first quarter of 1995 and a business plan was adopted for 1995 which would match slowly growing revenues with reduced costs resulting in the expectation of profitable operations by late 1995. In addition, the sales offices in most cities were closed and sales staffing reduced by over 50 percent.
As a result of this reorganization plan for COVER-ALL, special charges were reported in the fourth quarter of 1994 to write down a substantial portion of the unamortized capitalized software development costs (approximately $2.7 million) and accrue for excess facilities and other costs ($.6 million). Additional costs were incurred in the first quarter of 1995 for executive severance, employee severance, and write-off of software development costs as the COVER-ALL reorganization was completed. These 1995 provisions and write-offs, aggregating $1,165,000, were reflected as special charges in the Statement of Operations for the quarter ended March 31, 1995.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED OCTOBER 31, 1993 ----------------------------------------------------------------------
Total revenues from software licensing were $1,926,822 for the year ended December 31, 1994 as compared with $1,740,478 for the year ended October 31, 1993.
In 1993, COVER-ALL began developing a suite of computer applications to add functionality to the existing systems such as billing, statistical reporting, claims management, accounting and reinsurance. Known as a "Total Administrative Solution" ("TAS 2000"), the new product was designed to enable client-driven re-engineering of the insurer's business processes. Research and development expenses were increased in calendar 1994 to $2,499,436 from $805,563 in the year ended October 31, 1993.
Sales and marketing expenses were increased to $1,584,902 in calendar 1994, up from $535,338 in the year ended October 31, 1993 as a result of the establishment of new sales offices in several cities across the United States to provide better customer contact and support.
General and administrative expenses increased in calendar 1994 to $5,782,280 from $3,342,986 in the year ended October 31, 1993 due primarily to higher executive staffing levels and increased facilities costs.
In January 1996, the Company obtained approval from the New Jersey Department of Insurance to dissolve its insurance subsidiary, Alerion. As a result, plans were implemented to remove the remaining approximately $2.5 million of statutory minimum capital from Alerion. In January 1996, approximately $2.4 million was distributed to the Company from Alerion. A portion of these funds were used in connection with the Restructuring to satisfy certain legal and administrative expenses.
There was a $1 million letter of credit outstanding with a bank at December 31, 1995 issued in connection with certain of the Company's contractual obligations. The letter of credit expired in February 1996 and the $1 million of cash collateral was returned to the Company, $887,500 of these funds were utilized by the Company as the cash portion of the settlement distributed to certain ISD customers and The Robert Plan Corporation in connection with the Restructuring. In addition, $1.6 million was paid by the Company to the one ISD customer who did not participate in the Restructuring.
Cash flows from continuing operating activities were positive in calendar 1995 by $2,450,142 as compared with negative cash flows of $6,790,723 in calendar 1994, primarily due to reduced operating losses and decreased working capital requirements in 1995 as a result of the reorganization plan instituted at the end of 1994.