The Company's headquarters is located in Fair Lawn, New Jersey where it occupies approximately 36,000 square feet under a lease which expires in 2000 at a current annual rental expense of approximately $400,000.
In addition, the Company also leased a facility with approximately 22,000 square feet in Somerset, New Jersey. This lease was to expire in 2002 but was terminated in December 1996 at a cost of $371,408. This facility was previously used by ISD and the Company did not anticipate utilizing this facility in the near future.
The Company believes that its headquarters is well maintained and adequate to meet its needs in the foreseeable future.
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, ------------------------
(Loss) income from discontinued operations less applicable income taxes/(benefit) of none, none, ($924), $670, $3,633 and $2,852, respectively -- (7,108) (6,754) Loss on disposal of discontinued operations, no tax benefit provided (393) (750) Net (loss) income (6,001) (11,402) (14,220)
Loss per share from continuing operations (.38) (.41) (.84) Net (loss) income per share(2) (.40) (1.33) (1.60) Cash dividends per share -- -- $.02
YEARS ENDED OCTOBER 31, TWO MONTHS ----------------------- ENDED DECEMBER 31, 1993 1993 1992 ---- ---- ---- STATEMENTS OF OPERATIONS DATA:
Loss on disposal of discontinued operations, no tax benefit provided Net (loss) income 377 3,710 3,266 Loss per share from continuing operations (.09) (.21) (.09)
(1) Includes a $1,165 ($.14 per share) and $3,373 ($.25 per share net of tax) special charge in 1995 and 1994, respectively. (2) All per share amounts are based on the increased number of shares giving retroactive effect to the impact of the five for four stock split by way of a twenty-five percent (25%) stock dividend declared on March 18, 1993. (3) Revenues of the discontinued operations (ISD) were none, $20,228, $32,893, $8,589, $68,515 and $88,858 respectively, for each of the periods above.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ------- --------------------------------------------------------------- RESULTS OF OPERATIONS ---------------------
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. The Company's service for Clarendon was performed under New Jersey's Limited Assignment Distribution Program ("LAD") which required that servicing carriers such as the Company bear some of the underlying insurance risk of the policies being handled. For this reason, the Company 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.
By the end of 1994, the Company decided that risk taking, even as a reinsurer, was not an attractive business strategy, particularly because of the substantial capital required by its insurance subsidiary relative to other Company capital commitments. The Company and Clarendon agreed, therefore, to end the reinsurance arrangement in the fourth quarter of 1994 and "commute" all reinsurance interests and liabilities back to the inception of the agreement, thus eliminating all reinsurance activity of Alerion. This had the effect of reducing revenues by $6.1 million and operating income by $.5 million in the fourth quarter of 1994. Since the Company was no longer willing to share in the underlying insurance risk of PAIP policies, it could not, by law, continue to provide policy administration and claims servicing to Clarendon under the LAD program after 1994.
Most of the Company'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 developments discussed above, ISD was suffering losses and, in addition, 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 2 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.
Accordingly, the Company's Consolidated Financial Statements have been restated for all periods to reflect ISD operations as "discontinued operations."
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995 -----------------------------------------------------------------------
Total revenues were $5,468,672 for the year ended December 31, 1996 as compared to $4,118,754 for the year ended December 31, 1995, an increase of 33%. License fees were $1,044,460 for the year ended December 31, 1996 compared to $1,421,866 in the same period in 1995 due to the sale of one additional contract in 1995. For the year ended December 31, 1996, maintenance revenues were $2,252,378 compared to $1,174,150 in the same period of the prior year due to an increased customer base and renegotiations of all contracts resulting in higher fees to customers. Professional services revenue contributed $2,171,834 for the year ended December 31, 1996 compared to $1,522,738 for the year 1995 as a result of new contracts signed and customers requesting additional modifications to the existing systems.
Sales and marketing expenses increased to $1,124,884 in 1996 compared to $465,045 as of December 31, 1995 due mostly to increased salary and benefit costs. The Company allocated additional resources to its sales and marketing group to work on a proposal for a major contract.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994 -----------------------------------------------------------------------
As described in Note 6 to the Consolidated Financial Statements, no net income tax benefit is available to the Company with respect to the loss it incurred in 1995.
In March 1996, the Company received $3,022,391 from the sale of Common Stock and Warrants and another $1,553,124 in May 1996 from the sale of additional Common Stock pursuant to a series of transactions with Software Investments Limited and Care Corporation Limited that are described in Note 9 to the Consolidated Financial Statements.
At December 31, 1996 and 1995 the Company had approximately $14,000,000 and $7,000,000 of operating tax loss carryforwards expiring in 2011 and 2010, respectively. The Tax Reform Act of 1986 enacted a complex set of rules which limit a company's ability to utilize net operating loss carryforwards and tax credit carryforwards in periods following an ownership change. These rules define an ownership change as a greater than 50 percent point change in stock ownership within a defined testing period which is generally a three-year period. As a result of stock issued relative to the Restructuring and other stock which may be issued related to the Debentures (see Note 12 to the Consolidated Financial Statements) the Company may experience an ownership change and consequently the Company's utilization of its net operating losses could be significantly limited.
The financial statements and supplementary data listed in Item 14(a)(1) and (2) are included in this report beginning on page 16.