Initial license revenues for 1996 increased $3.1 million (6.4%) due principally to an increase in domestic life insurance initial licensing activity of $5.9 million. This increase was offset by a decrease of $2.7 million in domestic property and casualty insurance initial licensing. However, initial license charges for 1995 included a $4.0 million non-recurring source code license agreement with a cross-industry vendor and $4.8 million related to joint marketing and distribution arrangements with NCR Corporation. These revenues were replaced, in part, by a large license of the Company's Series II and Series III products executed during the fourth quarter of 1996 for $6.2 million.
Initial license charges for 1996 include right-to-use charges (licenses excluding further MESA obligations) of $4.2 million compared to $5.6 million (inclusive of the $4.0 million source code license referred to above) for 1995. Initial license charges for the year also include termination charges (related to the buyout of monthly license charges) of $1.7 million and $3.5 million for 1996 and 1995, respectively.
Initial license revenues for 1995 increased $10.7 million (28.1%) due principally to an increase in international property and casualty insurance licensing activity of $13.3 million, which was largely attributable to licensing activity of Creative, which was acquired by the Company on December 31, 1994 (see table below). Domestic property and casualty insurance licensing revenues, which increased $3.7 million for 1995. The increase in property and casualty initial license revenues for 1995 was offset, in part, by a $6.6 million decrease in health insurance initial licensing revenue (see Note 11 of Notes to Consolidated Financial Statements).
Initial licensing 1996 1995 1994 (Dollars In Millions) Property and Casualty (domestic) $20.1 $22.8 $19.1 Life (domestic) 14.9 9.0* 14.2* International 16.9 17.0 4.8 $51.9 $48.8 $38.1
Services 1996 Change 1995 Change 1994 (Dollars In Millions) Professional and outsourcing $310.4 19.0% $260.8 24.9% $208.8 Information 158.3 (8.1) 172.3 (10.8) 193.1 Other 4.3 104.8 2.1 23.5 1.7 $473.0 8.7% $435.2 7.8% $403.6
Professional and outsourcing services revenues for 1996 increased $49.6 million (19.0%) compared to 1995. This increase was principally related to services from both new and existing contracts amounting to $22.2 million for the domestic property and casualty insurance business and $6.6 million for domestic life insurance business and $20.8 million for international. The increase in the international market was principally due to the acquisitions of Co-Cam at August 9, 1996, and micado at October 1, 1995, and new services contracts in Europe.
Information services revenues decreased $14.0 million (8.1%) from 1995 to 1996; however, excluding risk information services revenues (ceased and abandoned in the fourth quarter 1995), information services revenues increased $8.7 million (5.8%) principally related to an increase of $5.2 million in the domestic property and casualty automobile information services business and an increase of $4.0 million in life information services revenues.
Information services revenues decreased $20.8 million (10.8%) from 1994 to 1995, due principally to closing/divestiture of risk information services resulting in a $21.8 million decrease in revenues. The decrease in risk 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).
The Company believes that the operational and financial characteristics of its information services businesses differs substantially from its other business. Additionally with the continuing changes in the availability of and access to information the Company is evaluating the best way to provide information to its customers and whether ownership of the data is critical to satisfying the customer needs.
Computer and communications expenses increased $3.3 million (11.4%) for 1996 when compared to 1995, principally due to the effect of licensing expense related to the Company's long-term license and maintenance agreement (entered into March 27, 1995) to acquire rights to certain operating systems management software products for use in the Company's worldwide data center operations, and the effect of lease expense associated with leases entered into as part of the Company's restructuring of its data processing facilities. As a percentage of professional and outsourcing revenues, computer and communications expenses remained relatively constant at 10.3% for 1996, 11.1% for 1995 and 11.5% for 1994.
Computer and communications expenses increased $4.8 million (20.0%) to $28.8 million for 1995 compared to $24.0 million for 1994. This increase is due principally to expenses for certain operating system management software products utilized in the Company's worldwide data center operations (see Note 8 of Notes to Consolidated Financial Statements), and increased communications, data circuit and maintenance costs associated with the growth of the Company's domestic and international outsourcing operations.
Other costs and expenses increased 40.8% for 1995 compared to 1994. This increase resulted primarily from increased costs due to the December 1994 acquisition of Creative.
Amortization of goodwill and other intangibles increased 11.8% for 1996 compared to 1995, principally due to the result of amortization of intangible assets related to the October 1995 acquisition of micado.
Litigation settlement and expenses net, resulted in a net credit in May 1996 when the Company resolved its litigation with the California State Automobile Association Inter-Insurance Bureau and the California State Automobile Association ("CSAA"), concluding with an agreement for the mutual dismissal of all related claims and counterclaims as well as the Company's recovery of certain defense costs incurred relative to the CSAA matter, with interest. As a result, the Company recorded a $9.4 million pre-tax gain for this recovery during the second quarter. Additionally, in February of 1997, the Company determined it was necessary to increase its estimate of anticipated liability for the costs associated with the verdict in the Security Life of Denver Insurance Company (SLD) matter and as of December 31, 1996 recorded an additional $6.0 million for the costs in this matter (see Note 8 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 existed.
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. The Company entered into two and four 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 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 charges, aggregating $18.4 million, are recorded under Loss on disposition of data processing equipment for the year ended December 31, 1995.
During the fourth quarter of 1995, the Company recorded charges aggregating $4.1 million to provide for the costs of restructuring its property and casualty risk information services business ($3.7 million) and the costs associated with the consolidation of existing operations with those of an acquired business in Germany ($.4 million). Additionally, during the fourth quarter of 1995, the Company recorded charges aggregating $6.7 million to write-off or write-down, as appropriate, the carrying values of certain identifiable intangible assets and goodwill related to prior business acquisitions ($5.2 million) and computer software ($1.5 million).
The Company recorded certain impairment and restructuring charges amounting to $30.7 million for 1994. 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.
Operating income, after the effects of the litigation settlement, litigation recovery and credit to impairment and restructuring expense, was $74.7 million for the year ended December 31, 1996. In May 1996, the Company recorded a $9.4 million pre-tax gain for the recovery of legal expenses following the resolution of the CSAA matter. During the year the Company also recorded a $1.1 million credit to change estimates associated with previously established restructuring reserves. At year end the Company recorded a $6.0 million pre-tax charge following the judgment in the SLD matter.
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. These results included a gain from the sale of the Company's Health Division of approximately $8.1 million. 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).
Excluding the gain, special charges and credit, operating income was $70.2 million for 1996, compared with $65.1 million for 1995 and $47.7 million for 1994. The consecutive increases in operating income from 1994 through 1996, excluding the gain and special charges, results principally from aggregate increases in initial license revenues from both property and casualty and life insurers of $3.0 million from 1995 to 1996 and $10.8 million from 1994 to 1995, increases in professional and outsourcing services revenues from new international services contracts and new and existing contracts with domestic property and casualty insurance companies and residual markets of $39.6 million from 1995 to 1996 and $51.3 million from 1994 to 1995, and from increases in new professional and outsourcing services revenues from life insurers of $17.0 million from 1995 to 1996 and $16.4 million from 1994 to 1995. Operating income, as a percentage of total revenues, excluding the effects of the gain and special charges as described above, was 12.1% for 1996, 12.1% for 1995 and 9.7% for 1994.
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 port- folio. The Company incurred a loss on the sale of securities of $1.9 million related directly to this liquidation during 1994.
The effective income tax (benefit) rate (income taxes expressed as a percentage of pre-tax income) was 36.2%, 61.1% and (47.8%) for the years ended December 31, 1996, 1995, and 1994, respectively. The effective tax benefit rate in 1994 changed significantly, due principally to the Company's settlement with the Internal Revenue Service relating to all issues in the 1985 through 1990 examinations. As a result of this settlement, the Company's 1994 provision for income taxes reflected a $6.0 million reduction of taxes provided in prior periods. The effective income tax benefit rate for 1994 also includes the impact of the increase in the highest marginal corporate tax rate resulting from the enactment of the Omnibus Budget Reconciliation Act of 1993. The effective income tax rate for 1995 increased further as the result of the Company's expensing, for book purposes, purchased research and development associated with its October 1, 1995 acquisition of micado (see Note 2 of Notes to Consolidated Financial Statements), nondeductible write-offs of goodwill impairment (see Note 12 of Notes to Consolidated Financial Statements) and the nondeductible amortization of goodwill. These effects were offset, in part, by the higher tax basis than book basis of the assets divested related to the sale of the Company's Health Insurance Systems Division (see Note 11 of Notes to Consolidated Financial Statements) and differences between the U.S. tax rate and tax rates imposed on the income of foreign subsidiaries.
Cash provided by operations 96.8 104.7 Cash (used) by investing activities (91.3) (98.6) Cash (used) provided by financing activities (18.7) 10.8
The Company's current ratio (current assets divided by current liabilities) stood at 1.5 at December 31, 1996, which management believes is sufficient when combined with the available credit facilities to provide for day-to-day operating needs and the flexibility to take advantage of investment opportunities. The Company has available under its credit facilities (net of amounts outstanding at December 31, 1996) $77.0 million under its 364 day $100.0 million facility and $61.0 million under its 3 year $100.0 million facility, should management choose debt financing for any of the Company's operating, investing or financing activities. Also, the Company has available an uncommitted $10.0 million operating line of credit with which it may choose to fund temporary operating cash needs (see Cost and Expenses above and Note 8 of Notes to Consolidated Financial Statements).
Cash provided by operations decreased in 1996 as a result of several factors. During the year the Company made a cash payment of $6.2 million relating to a 1995 business acquisition and $73.6 million resulting from the repurchase of the Company's common stock. Additionally, the Company made cash payments of $8.1 million against its restructuring reserves, as well as other accrued items, in the normal course of business and paid significant amounts previously accrued in 1995 related to its ongoing legal proceedings.
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. The Company believes that current and potential customers' decisions to enter into license agreements with the Company, may be significantly affected by strategies to make their existing information systems capable of handling the year 2000.
Additionally, the Company has an outsourcing contract that, due to legislation in 1996, has caused a portion of the revenue to shift to the last half of the year.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements in this annual report that are not descriptions of historical facts may be forward-looking statements that are subject to risks and uncertainties, including economic, competitive and technological factors affecting the Company's operations, markets, products, services and prices, as well as other specific factors discussed in Note 14 of Notes to Consolidated Financial Statements and elsewhere herein and in the Company's filings with the Securities and Exchange Commission. These and other factors may cause actual results to differ materially from those anticipated.
We have audited the accompanying consolidated balance sheets of Policy Management Systems Corporation as of December 31, 1996 and 1995 and the related statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Policy Management Systems Corporation and subsidiaries as of December 31, 1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
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.
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalent.
Investment securities with maturities of three months or less at the time of acquisition are considered cash equivalents.
Gains and losses on dispositions of property and equipment are determined based on the difference between the cash plus the fair value of any assets received (in the case of a nonmonetary transaction) less the net book value of the asset disposed of at the date of disposition.
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Assets to be Disposed Of" (FAS 121). The Statement requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the expected future cash flows of those assets are less than the assets' carrying amount. FAS 121 also addresses the accounting for long-lived assets that are expected to be sold or discarded. The Company adopted FAS 121 January 1, 1996. The effect of adoption was not material to the Company's financial condition or results of operations.
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 over the estimated useful life, generally three to five years, 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. 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. Product enhancements are improvements to an existing product that are intended to extend the life or improve significantly the marketability of the original product. Costs incurred for product enhancement are charged to expense as research and development until technological feasibility of the enhancement has been established. Upon release of the enhanced product, the unamortized value of the original product is added to the capitalized cost of the enhancement and amortized using the estimated life of the enhancement. 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 , $.9 and $2.5 million for the years ended December 31, 1996, 1995 and 1994, 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.
The provision for income taxes and corresponding balance sheet accounts are determined in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). Under FAS 109, the deferred tax liabilities and assets are determined based on temporary differences between the bases of certain assets and liabilities for income tax and financial reporting purposes. These differences are primarily attributable to differences in the recognition of depreciation and amortization of property, equipment and intangible assets and certain software development costs and revenues.
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 effect is immaterial.
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 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 was deferred at the date of acquisition and was paid during 1996.
The following is a maturity summary of the available-for-sale and the held-to-maturity securities included in marketable securities as of
The following is a summary of available-for-sale and held-to-maturity securities included in marketable securities as of December 31, 1995:
Depreciation and amortization charged to expense was $23.7, $28.1 and $28.7 million for the years ended December 31, 1996, 1995 and 1994, respectively.
Amortization charged to expense was $10.4, $9.3 and $8.7 million for the years ended December 31, 1996, 1995 and 1994, respectively. Goodwill and other intangible assets with an aggregate carrying value of $5.2 million were written off as part of impairment and restructuring charges recorded during the year ended December 31, 1995 (see Note 12).
A summary of capitalized software costs is as follows: December 31, 1996 1995 (In Thousands) Internally developed software $267,461 $210,686 Purchased software 29,518 26,265 296,979 236,951 Less: Accumulated amortization (119,104) (90,969) Capitalized software costs, net $177,875 $145,982
On August 9, 1996, the Company renewed two unsecured credit facilities of $100 million each with a syndicate of financial institutions to provide an additional source of funds for general corporate purposes. The first $100 million facility bears a term of 364 days. The second $100 million facility bears a term of 3 years. Borrowings under the facilities bear interest payable at per annum rates based upon the Morgan Guaranty Trust Company's Prime Rate, the Federal Funds Rate, the London Interbank Offering Rate or the yield on certain certificates of deposit as appropriate, plus a spread above certain of these rates ranging from .4% to .6375% dependent upon certain financial ratios of the Company. Additionally, the Company pays a per annum facility fee on the aggregate amount of the commitments ranging from .1875% to .2%. The Company is subject to certain covenants including, but not limited to, the maintenance of certain operating ratios and levels of tangible net worth. The average interest rate applicable to borrowings under these credit facilities was 6.16% and 6.34% for the years ended December 31, 1996 and 1995, respectively.
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, 1996, the net unamortized amounts related to this continuing agreement, included in other intangible assets, were $12.2 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 $7.7, $7.1 and $7.4 million for the years ended December 31, 1996, 1995 and 1994, 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.
The Company leased certain data processing and related equipment primarily under operating leases expiring through 1996. Rent expense under operating leases for such equipment was $7.5, $4.9 and $5.2 million for the years ended December 31, 1996, 1995 and 1994, respectively. All minimum lease payments under operating leases for data processing and related equipment are included in rent expense.
Future minimum lease obligations under noncancelable operating leases are stated below and include payments over 18 years aggregating $5.9 million related to a leasehold planned for future abandonment (see Note 12):
Facilities Year Ending December 31, (In Thousands) 1997 $ 9,981 1998 6,711 1999 5,484 2000 4,478 2001 4,064 Thereafter 9,846 Total $40,564
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 power to subpoena documents and to compel testimony in connection with their investigation. The Company is cooperating with this investigation.
In March 1994, Security Life of Denver Insurance Company ("SLD") brought suit against the Company in the United States District Court for the District of Colorado alleging breach of a life insurance joint development contract, unfair trade practices, and fraud. SLD sought direct, indirect, consequential, and punitive damages in excess of $80 million. In February of 1997 following a jury trial, the Court and jury entered judgments in favor of the Company against SLD on the claims of fraud and unfair trade practices. A verdict and judgment was returned against the Company for breach of contract and damages of $3.5 million, together with pre-judgment interest. In addition the jury found that SLD was using the Company's trade secrets without permission. Pending before the Court are the Company's request for a court order requiring return of the Company's trade secrets and for SLD to cease further use of the Company's systems, and the Company's motions for judgment notwithstanding verdict. Depending on the outcome of the pending matters, the Company may appeal the judgment to the United States Court of Appeals. As a result of this judgment, the Company determined it was necessary to increase its estimate of anticipated liability for the estimated costs associated with these matters, and at December 31, 1996, provided an additional $6.0 million for the estimated judgment, interest, and legal expenses arising from this matter. Changes in the status of this proceeding could result in a change in this estimate in subsequent periods.
In connection with the Company reaching an agreement with CSAA for the dismissal of the CSAA matter, St. Paul and the Company agreed to dismiss with prejudice all claims against each other with respect to the CSAA matter, and St. Paul agreed to reimburse the Company for the Company's legal fees in the CSAA matter (in excess of its deductible) with interest. As a result of this recovery, the Company recorded a gain of $9.4 million in the second quarter of 1996. This agreement resolved the Company's and St. Paul's claims related to the CSAA matter. The action continues as to the parties claims related to insurance coverage for the SLD matter.
In addition to the litigation described above, there are also various other litigation proceedings and claims arising in the ordinary course of business. The Company believes it has meritorious defenses and is vigorously defending these matters. While the resolution of any of the above matters could have a material adverse effect on the results of operations in future periods, the Company does not expect these matters to have a material adverse effect on its consolidated financial position. The Company, however, is unable to predict the ultimate outcome or the potential financial impact of these matters.
Increase (decrease) in provision from: Goodwill (3.4) (31.4) 25.1 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) State and local income taxes, net of federal tax effect 1.8 3.0 (0.2) Differences in foreign and US tax rate - (23.2) 0.3 Deferred tax asset valuation allowance - 14.8 - Other 2.8 6.0 1.8 1.2% 26.1% (12.8)% Effective income tax provision (benefit) rate 36.2% 61.1% (47.8)%
The Company generated a $23.9 million net operating loss for the year ended December 31, 1995 for tax purposes. Certain foreign subsidiaries of the Company have net operating loss carryforwards at December 31, 1996 totaling approximately $3.7 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 $24 million at December 31, 1996) since the Company plans to permanently reinvest all such earnings. However, if such earnings were remitted, there would be additional federal income tax expense of $3.1 million.
The Company has foreign tax credit carryforwards at December 31,1996 of $3.8 million which will expire on December 31, 2001. 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, $3.5 and $2.2 million for the years ended December 31, 1996, 1995 and 1994, respectively.
In May 1995, the Company established a stock ownership plan through which eligible employees of the Company and its participating affiliates may acquire shares of the Company's common stock through regular payroll deductions. Participants may make after-tax contributions in multiples of $5.00, with a minimum deduction per pay period of $10.00 and a maximum deduction per pay period of the lesser of $900.00 or 10% of regular salary. The Company makes a matching contribution equal to 15% of Participant contributions. Participants who withdraw shares acquired under the Plan within two years of the date of purchase are ineligible to make further contributions to purchase shares under the Plan for twelve months after such withdrawal.
In January and February 1994, options were granted under the 1993 Long-Term Incentive Plan for Executives to two new executive officers, according to the formula in the plan. In May 1994, options were granted under the 1989 Stock Option Plan to eligible employees. In October 1994, additional options were granted under the 1989 Stock Option Plan to the Directors and to certain senior executives, a portion of which were subject to approval by the Company's stockholders of an amendment to increase the number of shares reserved for issuance under that plan. In November 1994, options were granted to a new Director under the 1989 Stock Option Plan, subject to approval by the Company's stockholders of the aforementioned amendment. At the annual meeting in May 1995, the amendment was approved. Pursuant to the formula regarding promotions of participating officers, as set forth in the 1993 Long-Term Incentive Plan for Executives, options were granted under this plan to certain individuals who were promoted since participating in the plan.
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, 1996, 1995 and 1994, were $15.13 to $49.63. The exercise prices of shares under option at December 31, 1996, 1995 and 1994, 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 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 after May, July and November 1995 are exercisable at the rate of 20% per year (cumulative), beginning one year from date of grant, except for 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.
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). This Statement requires that companies with stock-based compensation plans either recognize compensation expense based on new fair value accounting methods or continue to apply the provisions of Accounting Principles Board Opinion No. 25 and disclose pro forma net income and earnings per share assuming the fair value method had been applied.
On April 8, 1996 the Company repurchased 759,512 of the 1,519,024 shares of the Company's common stock held by GAP Coinvestment Partners and General Atlantic Partner 14 L.P. (collectively "General Atlantic Investors") and the remainder of the Company's shares owned by General Atlantic Investors were purchased by Continental Casualty Company, a licensee of the Company's Series III Solutions. The repurchase by the Company, at a price of $50.00 per share, resulted in an aggregate cash expenditure (after related costs) of approximately $38.7 million.
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 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 believed that the combination of factors would result in a continued decline in demand for certain information services. As a result of a detailed business assessment, revised forecasts of 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 were not fully recoverable. Therefore 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. 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. As a result of its continued detailed business assessment, the Company 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 sold the pre-employment business and completely ceased and abandoned 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.
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 Auen-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.
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 in the fourth quarter of 1994 to write-off the carrying value of such software.
The Company's operations are classified into five operating units. Operating business units are revenue producing components of the Company about which separate financial information is produced internally and operating decisions are made. The units are as follows:
4. Property and casualty information services. This unit provides information services, principally motor vehicle records and claims histories, to US property and casualty insurers.
5. Life information services. This unit provides information services, principally physician reports and medical histories to US life insurers.
As a result of the above and other factors, the Company's earnings and financial condition can vary significantly from quarter-to-quarter and year-to-year. These variations may contribute to volatility in the market for the Company's common stock.
On February 7, 1997, the federal court entered a judgment for damages of $3.5 million against the Company for breach of contract in its lawsuit with Security Life of Denver following a jury trial. As a result, the Company has recorded a provision of $6.0 million in 1996 to cover the damages, prejudgment interest and anticipated legal fees and expenses arising from these matters. The company is still evaluating its post-trial options and has made a number of post-trial motions. Additionally the Company is pursuing claims against its insurance carrier for legal fees and expenses in this case (See also Note 8 Contingencies - Legal Proceedings).