The Company's revenues are generated principally by licensing to customers standardized insurance software systems and providing automation and administrative support and information services to the worldwide insurance industry. Licensing revenues are provided for under the terms of nonexclusive and nontransferable license agreements, which generally have a noncancelable minimum term of six years and provide for an initial license charge and a monthly license charge. Services revenues are derived from professional support services, which include implementation and integration assistance, consulting and education services, 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, administration support and automated information services through the Company's nationwide telecommunications network using the Company's database products.
Initial license revenues for 1994 increased $11.6 million (43.8%) compared to 1993. The increase is principally related to $10.4 million in systems license revenue from life insurers and to an expanded license agreement with a large Blue Cross Blue Shield organization and other licensing activities in the health insurance systems business amounting to $6.5 million (see table below). Increased system licensing in the life insurance market reflected growing customer interest in the Company's CK/4 Enterprise and CyberLife software system solutions. The Company does not expect to see recurring transactions such as the $5.9 million Blue Cross Blue Shield license expansion (see Note 11 of Notes to Consolidated Financial Statements). 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 resulted from increased licensing in 1994 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.
Life: Domestic $ 8.6 $ 7.3 - International 2.7 2.9 $( .2) Total $11.3 $10.2 $( .2)
Health: Domestic $ .3* $ 6.9 $ .4 International - - - Total $ .3 $ 6.9 $ .4
Combined: Domestic $30.3 $33.0 $23.0 International 18.5 5.1 3.5 Total $48.8 $38.1 $26.5
Monthly license charges for 1995 increased $2.3 million (4.5%) compared to 1994. This increase is principally related to an increase of $2.0 million attributable to the acquisition of Creative in December 1994, a $1.8 million increase in revenues associated with licensing activities in the property and casualty domestic market and to a $1.2 million increase in maintenance revenues related to servicing life insurers in the Nordic market. This increase was partially offset by a $2.8 million decline in other licensing activity, principally in the health insurance systems business.
Professional and outsourcing services revenues for 1995 increased $51.7 million (24.8%) compared to 1994. This increase was principally related to services from both new and existing contracts amounting to $51.3 million for property and casualty insurance business and $16.4 million for life insurance business, and was partially offset by a decrease in revenues from the health insurance market of $16.0 million (see Note 11 of Notes to Consolidated Financial Statements). The increase in property and casualty business was the result of increased services in both the domestic and international markets. The increase in the domestic market was the result of an $11.1 million increase in volume related to new and existing professional and outsourcing services contracts and a $12.0 million increase in volume related to the governmental and residual markets for total policy management outsourcing services, while the increase in the international market of $28.2 million was principally due to the acquisition of Creative at December 31, 1994, and new services contracts in Europe, Canada and the Asia-Pacific region. The increase in life insurance business is principally the result of volume increases relating to both new and existing outsourcing contracts and a new agreement for total policy administration services in the domestic market, and to an increase in the volume of professional and outsourcing services related to new contracts in Europe.
Information services revenues decreased $20.7 million (10.7%) from 1994 to 1995, due principally to a $23.3 million decrease in revenues related to the Company's domestic property and casualty automobile and risk information services business. The decrease in revenues associated with the property and casualty information services business was partially offset by a $2.6 million (4.6%) increase in life information services revenues (principally attending physician statements and medical history reports).
Information services revenues for 1994 increased $1.3 million (.7%) compared to 1993. This increase is principally related to a $2.5 million increase in 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 experienced significant underwriting margin erosion. In some cases, insurance companies were forced to discontinue writing business in certain high-risk areas and in general reduced new business activity. Consequently, the demand for information services declined, intensifying competition among information providers and placing downward pressure on price. During the first quarter of 1994 there was a major earthquake in California and, by the second quarter, several insurance companies that used the Company's information services had stopped writing business in that state. With the loss of key customers and the prospect of a further decline in sales resulting from this changing industry environment, the Company undertook a detailed assessment to determine future expectations for this business (For a more detailed discussion of the effects of this assessment, see Costs and Expenses below and Note 12 of Notes to Consolidated Financial Statements).
Employee compensation and benefits increased $22.1 million (12.6%) for 1995 compared with 1994, and is principally the result of increased salaries and related costs associated with the acquisition of Creative in December 1994, increased costs associated with the growth in staffing for additional professional and outsourcing services to new and existing customers, and an increase in the accrual for performance compensation expense. These increased costs were offset in part by a decrease in the use of temporary employees and a decrease in compensation and other benefits related to the Company's sale of its health insurance systems division on June 30, 1995 (see Notes 11 and 12 of Notes to Consolidated Financial Statements).
Computer and communications expenses increased $3.0 million (13.3%) to $25.4 million for 1994 compared to $22.4 million for 1993. This increase results primarily from increased costs associated with business acquisitions.
Information services and data acquisition costs increased $2.2 million (1.7%) for 1994 compared with the corresponding period in 1993, due primarily to an increase in the volume of state fees for motor vehicle reports, which is part of the Company's property and casualty automobile information services business, and an increase in the volume of fees for medical reports provided by the Company's life information services business.
The Company, as a result of significant changes in the property and casualty insurance industry, experienced a $5.1 million operating loss (before interest and income taxes) in its property and casualty domestic automobile and risk information services business in 1994 ($.8 million for automobile and $4.3 million for risk) on revenues of $128.9 million ($102.5 million for automobile and $26.4 million for risk). Although the Company took actions during 1994 to improve the overall performance of these businesses, such as implementing management changes, realignment and consolidation of field offices, and refining and enhancing current product offerings, these businesses 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 multiple years of major catastrophic losses affecting this industry. The Company believes that this industry reacted 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. 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 increased, leading to intense price competition among information providers, the Company's competitors, through package pricing, were offering certain competing products to the market below the Company's cost. The Company believed that the combination of factors would result in a continued decline in demand for certain information services.
As a result of detailed business assessments, revised forecasts of discounted expected future cash flows and the application of the Company's accounting policy to evaluate recoverability, the Company determined that the carrying value of certain intangible assets of these businesses was not fully recoverable. The Company recorded, at October 1, 1994, impairment charges of $19.1 million to write-off the carrying value of certain identifiable intangible assets ($6.4 million) and goodwill ($12.7 million) related to its property and casualty automobile and risk information services businesses.
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 the 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 that 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.
The Company, as a result of its continued detailed business assessment, determined that there were no further services or investment alternatives that could bring these operations to profitability and that the cash losses related to the risk information services business would continue into the future. As a result, the Company decided to restructure its property and casualty information services business and cease providing certain data collection services, including property inspections, commercial audits and pre-employment checks. The Company decided to sell the pre-employment business and completely cease operations in property inspections and commercial audits. As a result, the Company recorded, at December 31, 1995, restructuring charges of $3.7 million for disposal and severance charges related to exiting these operations.
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.
Expected future cash flows for these businesses are based on the current level of operating income or 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 discount rates of 10-18%, which include factors for equity commensurate with the risk associated with the various businesses. These rates were determined using the Capital Asset Pricing Model which reflects the return the Company should achieve on its investment.
The Company established reserves of $2.0 million at December 31, 1994, in connection with the acquisition of 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).
In connection with the October 1, 1995 acquisition of micado, the Company expensed $14.5 million relating to purchased research and development. Such amount was determined based on the estimated replacement cost related to the acquired technology for which technological feasibility has not been established and no alternative future use exists. The Company incurred research and development costs of approximately $.4 million during the fourth quarter of 1995. The Company anticipates technological feasibility of the project will be reached in 1996. Additionally, the Company recorded reserves of $.4 million related to this acquisition to provide for the consolidation of existing operations with those of micado (see Note 2 of Notes to Consolidated Financial Statements).
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. This migration will enable the Company to employ the latest technology in its data center operations and improve the quality of service provided to its customers, as well as take advantage of significant projected future cost savings provided by the efficiency of the new technology and industry projections for decreasing unit costs of this technology. The Company entered into 2 and 4 year renewable lease agreements to acquire this technology (see Notes 4 and 8 of Notes to Consolidated Financial Statements), which will also allow the Company to take advantage of technological advances in this area without the large capital burden and lack of flexibility resulting from the outright purchase of such technology. As a result of the migration, the Company disposed of its existing data processing 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.
Operating income, after the effects of the gain from the sale of the Health Division and special charges, was $8.6 million for the year ended December 31, 1995. The Company on June 30, 1995, recorded a gain from the sale of the Company's Health Division of approximately $8.1 million (see Note 11 of Notes to Consolidated Financial Statements). Special charges aggregating $64.6 million recorded during the year ended December 31, 1995 relate to impairment and restructuring charges, net ($10.6 million), litigation settlement and other legal expenses ($18.5 million), charges incurred in connection with the restructure of the Company's data center facilities ($18.4 million), and certain charges related to business acquisitions ($17.1 million).
Licensing revenues, as a percentage of total revenues, increased from 16.5% of total revenues for 1993 to 18.1% for 1994 and 19.0% for 1995 (see Revenues). Excluding the effect of licensing revenues from the Company's health division (sold on June 30, 1995 - see Note 11 of Notes to Consolidated Financial Statements) of $3.8 million for 1993, $7.2 million for 1994, and $.3 million for 1995, licensing revenues as a percentage of total revenues increased from 15.8% for 1993 to 16.9% for 1994 and 19.0% for 1995. A significant portion of both the Company's revenues 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 are recorded at the time systems are licensed, there can be significant fluctuations from quarter-to-quarter and year-to-year in the revenues and operating income derived from licensing activities. This is attributable principally to the timing of customers' decisions to enter into license agreements with the Company, which the Company is unable to control.
1993 $ 8.2 $11.9 $ 3.4 $ 3.0 $ 26.5 Initial license revenues 31.1% 45.0% 12.8% 11.1% 100.0% Total revenues 6.9% 10.2% 3.1% 2.7% 5.8%
During 1994, the Company made large cash expenditures for the acquisition of Creative ($19.9 million) in December 1994, the repurchase of 2,278,537 of the 3,797,561 shares of common stock held by IBM ($56.6 million) in May 1994, the repurchase during the last half of 1994 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 payments to settle the shareholder class action and related expenses made principally during the fourth quarter of 1994. Consequently, the Company maintained a lower level of investable funds during 1995, resulting in a decrease in investment income of $3.4 million.
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 ($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 above described purchases in 1994 of the Company's common stock and to a decrease in interest income related to long-term accounts receivable.
As part of the Company's repurchase of 2,278,537 shares of its common stock held by IBM, at a price of $24.71 per share, and the open market repurchase of 995,500 shares of common stock, the Company liquidated a portion of its marketable securities portfolio. The Company incurred a loss on the sale of securities of $1.9 million related directly to this liquidation during 1994 (see Note 11 of Notes to Consolidated Financial Statements).
Cash provided by operations 104.7 59.9 Cash (used) provided by investing activities (98.6) 33.9 Cash provided (used) by financing activities 10.8 (98.9)
The Company's financial condition remained strong at December 31, 1995. The increase in cash and equivalents, marketable securities and investments compared to December 31, 1994 is due principally to cash flows generated by operations, and proceeds from the Company's unsecured credit facilities (discussed below). The Company's current ratio (current assets divided by current liabilities) as of December 31, 1995, decreased slightly from 1994, principally as a result of litigation costs accrued for during 1995 (see Cost and Expenses above and Note 8 of Notes to Consolidated Financial Statements).
On August 11, 1995 the Company entered into two unsecured credit facilities of $100 million each with a syndicate of financial institutions. These lines of credit may be used for general corporate purposes (see Note 7 of Notes to Consolidated Financial Statements). During 1995, the Company utilized these facilities to fund, in part, the acquisition of a business in Germany (see Note 2 of Notes to Consolidated Financial Statements) and other assets during the fourth quarter of 1995.
Significant expenditures planned for 1996, 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 ($9.1 million); costs relating to the internal development of software systems ($51.0 million); and payments relating to past business acquisitions ($6.2 million).
The Company has historically used the cash generated from operations for the development and acquisition of new products, acquisition of businesses and repurchase of the Company's stock. The Company anticipates that, subject to market condition, it will continue to use its cash for all of these purposes in the future and that projected cash from operations will be able to meet presently anticipated needs; however, the Company may also consider incurring debt, as discussed above, as needed to accomplish specific objectives in these areas and for other general corporate purposes.
The Company's operating results and financial condition can be impacted by a number of factors, including the following, any of which could cause actual results to vary materially from current and historical results or the Company's anticipated future results.
the foreseeable future will be satisfied from cash flows from operations and the Company's currently existing credit facilities, unforeseen events or adverse economic or business trends may significantly increase cash demands beyond those currently anticipated or affect the Company's ability to generate/raise cash to satisfy financing needs.
The Company's operations have not proven to be significantly seasonal, although quarterly revenues and net income could be expected to vary at times. This is attributable principally to the timing of customers entering into license agreements with the Company and fluctuations in the amount of certain information services used by customers, principally during holiday seasons and periods of severe weather. The Company is unable to control the timing of these decisions or fluctuations.
Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993 31
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 33
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 34
Software systems are licensed under the terms of substantially standard nonexclusive and nontransferable license agreements, which generally have a noncancelable minimum term of six years and provide for an initial license charge and a monthly license charge. The initial license charge, which grants a right to use the software system currently available at the time the license is signed, is recognized as revenue upon delivery of the product and receipt of a signed contractual obligation, if collectibility is probable and no significant vendor obligations remain. The monthly license charge provides access to Maintenance, Enhancements and Services Availability (MESA). Under the maintenance provisions of MESA, the Company provides telephone support and error correction to current versions of licensed systems. Under the enhancement provisions of MESA, the Company will provide any additions or modifications to the licensed systems, which the Company may deliver from time to time to licensees of those systems if and when they become generally available. The monthly license charge is recognized as revenue on a monthly basis throughout the term of the MESA provision of the license agreement. Services availability allows customers access to professional services, other than maintenance and enhancements, which are provided under separate arrangements during the MESA term.
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. The fair value is estimated based on quoted market prices for those or similar investments. Net unrealized gains and losses, determined on the specific identification method, on securities classified as available-for-sale are carried as a separate component of Stockholder's Equity. The Company's adoption of FAS 115 did not have a material impact on the financial statements taken as a whole. In accordance with the statement, prior period financial statements have not been restated to reflect the change in accounting principle.
In accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed" (FAS 86), certain costs incurred in the internal development of computer software which is to be licensed to customers and costs of purchased computer software, consisting primarily of software acquired through business acquisitions, are capitalized and amortized at the greater of the amount computed using (i) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues of that product or (ii) the straight-line method over the remaining estimated economic life of the product including the period being reported on. Costs which are capitalized as part of internally developed software primarily include direct and indirect costs associated with payroll, computer time and allocable depreciation and other direct allocable costs, among others. The Company amortizes such software costs over five years and uses the straight-line method over the estimated useful life. 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 $.9, $2.5 and $2.7million for the years ended December 31, 1995, 1994 and 1993, respectively. The Company also recorded write-offs of $14.5 and $2.6 million representing purchased research and development costs during 1995 and 1994, respectively (see Note 2). The amount by which unamortized software costs exceeds the net realizable value, if any, is recognized in the period it is determined.
Net income (loss) per share is based upon the weighted average number of common shares outstanding. Outstanding stock options are common stock equivalents, and are excluded from the computation of net income (loss) per share since their dilutive effect is immaterial.
The American Institute of Certified Public Accountants has issued Statement of Position 93-7 (SOP 93-7), "Reporting on Advertising Costs," which is effective for fiscal years beginning after June 15, 1994. SOP 93-7 generally requires that advertising costs, with certain exceptions, be expensed as incurred or the first time the advertising takes place. As the Company has historically expensed advertising costs as incurred, the effects of the Company's adoption of SOP 93-7 during 1995 did not have a material effect on the Company's consolidated financial statements. Advertising expenses for 1995, 1994 and 1993 were $.6, $.5 and $.4 million, respectively.
On October 1, 1995, the Company acquired micado Beteiligungs-und Verwaltungs GmbH (micado). Headquartered in Germany, micado is principally a software provider to German insurance and financial services companies. The acquisition was financed principally from cash provided by operations and borrowings under the Company's credit facilities.The acquisition has been recorded using the purchase method of accounting. Accordingly, the Consolidated Statement of Operations for the year ended December 31, 1995, includes the results of operations of micado from the date of acquisition. In connection with the acquisition, the Company recorded an estimated liability of $.4 million at October 1, 1995, included in Impairment and restructuring charges, net in the accompanying Consolidated Statements of Operations, to provide for certain relocation and severance costs of consolidating existing operations in Germany with micado. At October 1, 1995, the Company also recorded a charge of $14.5 million representing purchased research and development for which technological feasibility had not yet been established and for which there is no alternative future use. Under the terms of the purchase agreement, payment of approximately $6.2 million of the purchase price has been deferred and is payable at certain intervals over the year subsequent to the date of acquisition.
On December 31, 1994, the Company acquired all of the outstanding capital stock of Creative Group Holdings, Limited (Creative). 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 has offices in England, Australia and Southeast Asia. The acquisition of Creative was 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 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 for the year ended December 31, 1994. At December 31, 1994, the Company also recorded a charge of $2.6 million representing purchased research and development for which technological feasibility had not yet been established and for which there is no alternative future use.
The following is a maturity summary of the available-for-sale and the held-to- maturity securities included in marketable securities as of December 31, 1995:
The following is a summary of available-for-sale and held-to-maturity securities included in marketable securities as of December 31, 1994:
On March 27, 1995, the Company entered into a long-term license and maintenance agreement in order to acquire rights to certain operating system management software products for use in the Company's worldwide data center operations. The agreement, which has an initial term of ten years, may be renewed and extended for an additional period of five years, subject to mutual agreement and other modifications. The March 27, 1995 agreement replaced three five-year term agreements executed in 1993, and other related agreements. Minimum contract payments by the Company over the initial ten year term aggregate $33.0 million payable in specified annual installments which escalate over the ten year period. The first annual installment due March 31, 1995 was reduced by $1.5 million to reflect the application of a pre-payment credit relating to a prior agreement which was terminated. In addition to minimum contract payments, the Company will pay an annual supplemental revenue fee (beginning 1997 for the 1996 annual period) equal to a specified annual percentage of the Company's applicable annual gross revenues, less the specified annual installment for such period. Minimum contract payments will be expensed on a straight-line basis over the initial ten year term. Annual supplemental revenue fees, if any, will be accrued in the period in which determined.
On April 7, 1995, the Company finalized certain terms of a ten-year agreement with an insurance holding company and its subsidiaries, initially entered into in November 1994. The Company is to provide certain data processing and other professional services as required. The minimum contractual processing revenues are expected to be in excess of $60 million over the term of the agreement. The Company incurred costs of $10 million related to this agreement in the second quarter of 1995 ($5 million in the fourth quarter of 1994), which have been deferred as contract acquisition costs and are being expensed on a straight-line basis over the term of the agreement. At December 31, 1995, the net unamortized amounts related to this continuing agreement, included in other intangible assets, were $13.7 million.
The Company occupies leased facilities under various operating leases expiring through 2014. The leases for certain facilities contain options for renewal and provide for escalation of annual rentals based upon increases in the lessors' operating costs. Rent expense under leases for facilities was $7.1, $7.4 and $7.7 million for the years ended December 31, 1995, 1994 and 1993, respectively. An amount of $1.8 million for lease abandonment charges is included in Impairment and restructuring charges, net in the accompanying Consolidated Statement of Operations for the year ended December 31, 1994. Amounts of $7.8 million for lease termination costs and $12.2 million for lease abandonment charges are included in the Impairment and restructuring charges, net in the accompanying Consolidated Statement of Operations for the year ended December 31, 1993 (see Note 12).
Facilities Year Ending December 31, (In Thousands) 1996 $11,609 1997 6,676 1998 3,393 1999 2,277 2000 1,537 Thereafter 6,788 Total $32,280
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.
In June 1993, the Securities and Exchange Commission (SEC) commenced a formal investigation into possible violations of the Federal securities laws in connection with the Company's public reports and financial statements, as well as trading in the Company's securities. The SEC has issued a formal order of investigation which provides the SEC staff with the power to subpoena documents and to compel testimony in connection with their investigation. The Company is cooperating with this investigation.
The Company also had been advised that the United States Attorney for the District of South Carolina was conducting an investigation into issues raised by the shareholder class action and SEC investigation described above. In January of 1996, the Company received a letter from the United States Attorney advising that the investigation had been terminated and advising that the United States Justice Department had closed its files on this matter.
Increase (decrease) in provision from: Goodwill (31.4) 25.1 22.9 Internal Revenue Service settlement - (32.5) - Revaluation of deferred state income tax liability (4.0) (5.4) - Purchased research and development 62.7 4.8 - Nontaxable investment income (1.8) (6.7) (3.6) State and local income taxes, net of federal tax effect 3.0 (0.2) (1.4) Differences in foreign and US tax rate (23.2) 0.3 - Deferred tax asset valuation allowance 14.8 - - Increase in statutory rate - - 1.6 Other 6.0 1.8 - 26.1% (12.8)% 19.5% Effective income tax provision (benefit) rate 61.1% (47.8)% (15.5)%
Current deferred liabilities: Other $ 691 $ 613 Current deferred liabilities 691 613
Long-term deferred liabilities: Depreciation and amortization of property, equipment and intangibles 16,217 13,743 Capitalized software development costs 47,321 38,625 Other 3,391 2,303 Long-term deferred liabilities 66,929 54,671 Total deferred liabilities $67,620 $55,284
The Company generated a $26.9 million net operating loss for the year ended December 31, 1995 for tax purposes. This loss, which is anticipated to be carried forward, will expire in 2010. Additionally, the Company has loss carryforwards from acquired companies of approximately $.7 million at December 31, 1995. The acquired loss carryforwards are subject to an annual limitation and will expire in 2002. Certain foreign subsidiaries of the Company have net operating loss carryforwards at December 31, 1995 totaling approximately $7.0 million, which may be used to offset future taxable income. The carryforwards have no expiration period.
No provision has been made for federal income taxes on unremitted earnings of certain of the Company's foreign subsidiaries (approximately $7.3 million at December 31, 1995) since the Company plans to permanently reinvest all such earnings. However, if such earnings were remitted, foreign tax credits would be available to substantially offset the resulting U.S. income tax.
The Company has foreign tax credit carryforwards at December 31, 1995 of $2.4 million which will expire on December 31, 2000. The Company recorded a valuation allowance of $3.1 million at December 31, 1995 related to certain deferred tax assets that are not anticipated to be utilized.
The Company offers the Policy Management Systems Corporation 401(k) Retirement Savings Plan to eligible employees. Prior to January 1, 1995, Participants could elect to contribute up to 10% of their salary to the Plan, on either a before-tax basis, an after-tax basis, or a combination of both. The Company made a matching contribution of 50% for the first 6% of salary contributed by the Participant. Beginning January 1, 1995, the Company made a matching contribution of 100% of the first 3% of salary contributed by the Participant and a matching contribution of 50% of the next 3% of salary contributed by the Participant. Subject to limits imposed by the Internal Revenue Service, the Internal Revenue Code and the Plan, Participants may also make additional before-tax and after-tax contributions that are not subject to matching contributions by the Company. Participants have several options as to how their contributions and vested Company contributions are invested. Until October 31, 1993, all non-vested and current Plan year Company contributions were invested in common stock of the Company. Non-vested and current Plan year Company contributions for the period November 1, 1993 through June 30, 1995 were invested in a government money market fund. Beginning July 1, 1995, non-vested and current Plan year Company contributions were again invested in common stock of the Company. The Company's contribution on behalf of participating employees was $3.5, $2.2 and $1.9 million for the years ended December 31, 1995, 1994 and 1993, respectively.
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 January 1993, options were 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, amendments increasing the number of shares available for grant under the 1989 Stock Option Plan and the 1993 Long-Term Incentive Plan for Executives were approved.
In January, July and October 1995, options were granted under the 1993 Long- Term Incentive Plan for Executives to five officers, promoted during 1995, according to the formula in the plan. In May and November 1995, options were granted under the 1989 Stock Option Plan to eligible employees. In July 1995, additional options were granted under the 1989 Stock Option Plan to certain senior executives.
Year Ended December 31, 1995 1994 1993 Shares under option at beginning of year 2,804,328 1,725,119 1,202,856 Granted 674,359 1,361,143 592,500 Exercised (73,130) - (21,777) Forfeited (299,393) (281,934) (48,460) Shares under option at end of year 3,106,164 2,804,328 1,725,119
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 those granted in October 1994 and after, are exercisable at the rate of 33 1/3% per year (cumulative) beginning one year from date of grant. The options granted in May, July and November 1995 are exercisable at the rate of 20% per year (cumulative), beginning one year from date of grant. The options granted in October 1994 to the senior executives are exercisable at the rate of 33 1/3% per year (cumulative) beginning three years from the date of grant.
Pursuant to a stock repurchase program approved by the Board of Directors in July 1994, the Company may purchase from time to time up to 2.5 million shares of its issued and outstanding common stock. This program is flexible as to the timing and method of acquisition of these shares. As of December 31, 1994, the Company had repurchased, on the open market, 995,500 shares of its common stock for a total of $35.3 million. There were no shares repurchased during the twelve months ended December 31, 1995.
As a result of a detailed business assessment, revised forecasts of discounted expected future cash flows and the application of the Company's accounting policy to evaluate recoverability, the Company determined that the carrying value of certain intangible assets of these businesses was not fully recoverable. The Company recorded, at October 1, 1994, impairment charges of $19.1 million to write-off the carrying value of certain identifiable intangible assets ($6.4 million) and goodwill ($12.7 million) related to its property and casualty automobile and risk information services businesses.
As a result of less than expected financial results for 1994 relating to the Company's on-site medical correspondence information services business, acquired in February 1993, the Company attempted to improve the results of the business by closing unprofitable offices and modifying the volume and type of services offered. These modifications resulted in an increase in staffing requirements and equipment expense, however, the anticipated increase in revenues did not occur, and the 1995 financial results of the business fell short of expectations. The Company performed a detailed assessment of the business and, expects a continuing decline in revenues and cash flows. Additionally, the Company expects that the state of Georgia will pass legislation in 1996 which would reduce the fees that could be charged for such services. Based on these, as well as other factors, the Company determined that the expected future cash flows of this business did not support the carrying value of the related goodwill and identifiable intangible assets. As a result, at October 1, 1995, the Company recorded impairment charges of $1.8 million to write-off the carrying value of the identifiable intangible assets ($1.1 million) and goodwill ($.7 million).
As part of a 1983 business acquisition, the Company acquired a billing and collection system (CABILS), which was originally utilized in specialty processing or the processing of assigned risk business for the Company's customers (principally those customers acquired in the business acquisition) and, later, evolved into the basis for a portion of the Company's full property and casualty total policy management processing for voluntary as well as assigned risk business. During 1995, several of the Company's customers of this business opted to either move some or all states served by them to LAD servicing carriers or to not renew their agreements for these services for other reasons. In addition, the Texas Plan implemented rate increases and a mandatory takeout plan which had the effect of further decreasing the number of policies served by the Company. During 1995, the Company decided to migrate its property and casualty total policy management processing to its Series III technology, replacing the software acquired in 1983. Based on a detailed business assessment performed by the Company, the anticipated discounted cash flows for this business for the period until the Series III migration is completed do not support the carrying value of the software and related goodwill associated with this business. As a result, the Company recorded, at October 1, 1995, impairment charges of $2.8 million to write-off the carrying value of the software ($.4 million) and related goodwill ($2.4 million).
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 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.
During the fourth quarter of 1994, the Company also 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 changed its dependency on AWS and integrated 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.
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). These charges were recorded at June 30, 1993, after 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. 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.
Since June 30, 1993, the Company 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's downsizing of this business continued into 1995, when its health insurance systems business was sold on June 30, 1995 (see Note 11).
The Company's operating results and financial condition can be impacted by a number of factors, including but not limited to the following, any of which could cause actual results to vary materially from current and historical results or the Company's anticipated future results.
Currently, the Company's business is focused principally within the global property and casualty and life insurance industries. Significant changes in the regulatory or market environment of these industries could impact demand for the Company's software products and services. Additionally, there is increasing competition for the Company's products and services, and there can be no assurance that the Company's current products and services will remain competitive, or that the Company's development efforts will produce products with the cost and performance characteristics necessary to remain competitive. Furthermore, the market for the Company's products and services is characterized by rapid changes in technology. The Company's success will depend on the level of market acceptance of the Company's products, technologies and enhancements, and its ability to introduce such products, technologies and enhancements to the market on a timely and cost effective basis, and maintain a labor force sufficiently skilled to compete in the current environment.
As discussed in Note 1, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Amounts affected by these estimates include, but are not limited to, the estimated useful lives, related amortization expense and carrying values of the Company's intangible assets and capitalized software development costs and reserves established for contingencies such as litigation and restructuring activities. Changes in the status of certain matters or facts or circumstances underlying these estimates could result in material changes to these estimates, and actual results could differ from these estimates.