Properties The Company owns its 700,000 square foot headquarters complex located on 145 acres in Columbia, South Carolina. The Company leases space at 37 various locations domestically for its regional and branch offices throughout the United States. Internationally, the Company has 14 locations in 7 countries throughout Canada, Europe and the Pacific Rim.
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
Licensing 1994 Change 1993 Change 1992 (Dollars In Millions) Initial charges.... $38.1 43.8% $26.5 (3.6)% $27.5 Monthly charges.... 51.0 5.8% 48.2 5.9 % 45.5 $89.1 19.3% $74.7 2.3 % $73.0
Services 1994 Change 1993 Change 1992 (Dollars In Millions) Professional and outsourcing...... $208.6 13.7 % $183.5 (28.6)% $256.9 Information........ 193.0 .7 % 191.7 23.8 % 154.8 Other.............. 2.0 (37.5)% 3.2 (30.4)% 4.6 $403.6 19.3 % $378.4 (9.1)% $416.3
Information services revenues for 1993 increased $36.9 million (23.8%) compared to 1992. This increase is principally related to $35.6 million of new services provided to the independent agency market and new customers, and to $8.2 million of life information services (principally attending physician statements and personal medical history interviews). These increases were partially offset by a $6.9 million reduction in revenues associated with the Company's domestic property and casualty risk information services business.
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. The increase of $1.3 million (6.1%) for 1993 compared to 1992 is primarily related to costs associated with the CYBERTEK acquisition.
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. Information services and data acquisition costs increased $37.5 million (40.3%) to $130.3 million for 1993 compared to $92.8 million for 1992. This increase is principally related to services provided to the independent agency market and new customers, and to a lessor degree, life information services (principally attending physician statements and personal medical history interviews).
As a result of a detailed business assessment, revised forecast 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 this business was not fully recoverable. The Company recorded 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 business. 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 in 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 the acquired software system. Consequently, the Company recorded impairment charges to write-off the carrying value of certain identifiable intangible assets, goodwill and acquired software, of $2.2 million related to this prior business acquisition. These non-cash impairment charges include acquired software of $1.5 million and identifiable intangible assets and goodwill of $.7 million.
Due to a decision by one of the Company's property and casualty insurance customers not to license software acquired by the Company for integration into its property and casualty software systems and the Company's decision not to market or license such software, the Company recorded impairment charges of $1.9 million to write-off the carrying value of such software. During the fourth quarter of 1994, the Company 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 will change its dependency on AWS and integrate new agency software system tools with its Series III functions. Consequently, the Company recorded impairment charges of $8.1 million to write-off the carrying value of AWS.
During 1994, the Company as a result of new events occurring changed its estimates and reduced its restructuring reserves associated with its health insurance systems business, established in June 1993, by $4.4 million, $2.6 million of which resulted from a change in the scheduled downsizing of the Company's health staff and a corresponding reduction in amounts established for severance and outplacement costs and $1.8 million of which resulted from a lease termination at amounts less than those established for the planned future abandonment of certain leased office facilities.
Depreciation and amortization expense decreased $2.0 million (3.3%) for 1994 compared with 1993. This decrease is principally related to a reduction in amortization charges of $5.1 million associated with the impairment of certain identifiable intangible assets, goodwill and software products principally related to the Company's health insurance systems and property and casualty information services businesses. This reduction was partially offset by an increase in amortization charges of $3.5 million associated with identifiable intangible assets, goodwill and software products related to the CYBERTEK acquisition in August 1993.
Depreciation and amortization expense increased $6.3 million (12.0%) for 1993 compared with 1992. This increase is principally related to an increase in amortization charges of $3.1 million associated with purchased software, $2.6 million associated with a change in the useful lives for goodwill, effective January 1, 1993 (see Note 1 of Notes to Consolidated Financial Statements), $3.1 million associated with additional property and equipment placed in service and $1.7 million associated with identifiable intangible assets, goodwill and software products principally related to the CYBERTEK acquisition in August 1993. These increases were partially offset by a decrease of $2.4 million associated with the impairment of certain identifiable intangible assets, goodwill and software products related to the Company's health insurance systems business and $1.8 million associated with a change in the estimated useful life of the Company's internally developed software from four to five years, effective January 1, 1993. Other operating costs and expenses for 1994 decreased $14.8 million (21.3%) compared with 1993. The decrease is primarily attributable to $16.4 million of charges related to early project terminations, the deductible under the Company's Directors' and Officers' liability insurance policy in response to shareholder litigation, cost overruns on certain projects and other related charges recorded in June, 1993. In addition to these charges, other operating costs and expenses declined as a result of a reduction in the cost of equipment sold, a decrease in costs associated with the wind-down of the New Jersey MTF project, a decrease associated with the recovery of certain receivables previously written off, and an increase in amounts capitalized principally related to the internal development of the Company's life software systems. These decreases were partially offset by an increase in operating costs associated with providing total policy management outsourcing services for new customers. Other operating costs and expenses for 1993 decreased $5.5 million (7.3%) compared with 1992. This decrease principally relates to a reduction in costs associated with the wind-down of the MTF project. However, the June 1993 one-time charges of $16.4 million partially offset this reduction in costs.
Operating Income The Company incurred operating losses of $19.7 and $77.1 million for 1994 and 1993, respectively. These losses were solely attributable to various special charges aggregating $71.9 and $98.8 million for 1994 and 1993, respectively. As discussed above, special charges in 1994 relate to impairment and restructuring charges ($35.1 million), charges related to the write-off of
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 new 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.
Set forth below is a comparison of initial license revenues by quarter expressed as a percentage of total initial license revenues and total revenues for each of the years presented:
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%
The information services businesses, which include property and casualty as well as life information services, produced an operating loss for 1994 of $2.9 million. The property and casualty business produced an operating loss of $6.1 million. These results were weaker than for 1993 when the property and casualty business produced an operating loss of $4.6 million, resulting in operating income of $.4 million for all information services. The 1994 performance in property and casualty is reflective of increasing price competition and changing market conditions.
The Company's health insurance systems business benefited in 1994 from a significant license agreement expansion with a Blue Cross Blue Shield organization resulting in the recognition of $5.9 million in revenue and from a reduction in operating costs associated with amortization charges for certain identifiable intangible assets and goodwill, which were written off at June 30, 1993, and rental expense related to lease terminations and compensation and other benefit costs through the downsizing of staff. The Company has engaged an investment banking firm to assist in evaluating its health insurance systems business.
The effective income tax (benefit) rate (income taxes expressed as a percentage of pre-tax income) was (47.8%), (15.5%), and 32.2% for the years ended December 31, 1994, 1993, and 1992, respectively. The effective tax benefit rate in 1993 was significantly lower than the statutory rate due to the nontaxable write-off of goodwill related to impairment (see Note 12 of Notes to Consolidated Financial Statements). 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 examination. 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 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 decrease in the effective rate for 1992 was due primarily to an increase in nontaxable investment income.
December 31, 1994 1993 (In Millions) Cash and equivalents, marketable securities and investments.................. $ 34.3 $156.8 Current assets..................... 167.7 287.7 Current liabilities................ 76.8 81.0 Working capital.................... 90.9 206.7 Long-term debt..................... 4.2 5.7
The Company's financial condition remained strong at December 31, 1994. Working capital was $90.9 million, including cash, cash equivalents and marketable securities of $28.7 million and excluding $5.6 million of long-term investments. Cash, cash equivalents, marketable securities and investments were $34.3 million at December 31, 1994, as compared to $156.8 million at December 31, 1993, a net decrease of $122.5 million resulting primarily from the repurchase of common stock; cash payments in connection with the Company's securities class action and to the acquisition of Creative Group Holdings, Limited, in December 1994 for a total consideration of $19.9 million, of which $18.8 million was paid in 1994.
During the fourth quarter of 1994, the Company entered into a $30.0 million unsecured line of credit with a bank for the purpose of supporting temporary working capital needs. However, there were no borrowings outstanding under this line of credit as of December 31, 1994, which expires on January 15, 1996 (see Note 7 of Notes to Consolidated Financial Statements). The Company is currently negotiating a $200 million medium-term line of credit for the purpose of funding certain business activities, including, but not limited to, the acquisition of businesses, the repurchase of the Company's stock, the reduction of short-term debt incurred in connection therewith or for general corporate purposes.
Although the Company cannot accurately determine the amounts attributable thereto, the Company has been affected by inflation through increased costs of employee compensation and other operating expenses. To the extent permitted by the marketplace for the Company's products and services, the Company attempts to recover increases in costs by periodically increasing prices. Additionally, most of the Company's license agreements and long- term services agreements provide for annual increases in charges.
Consolidated Balance Sheets as of December 31, 1994 and 1993......................... 27
We have audited the accompanying consolidated balance sheets of Policy Management Systems Corporation and subsidiaries as of December 31, 1994 and 1993 and the related statements of operations, changes in stockholders' equity and cash flows for the years ended December 31, 1994, 1993 and 1992. 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.
As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" in 1994.
Basis of Presentation The consolidated financial statements are prepared on the basis of generally accepted accounting principles and include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All material intercompany balances and transactions have been eliminated. Certain amounts previously presented in the consolidated financial statements for prior periods have been reclassified to conform to current classifications.
Revenue Recognition The Company's revenues are generated primarily by licensing to customers standardized insurance software systems and providing automation and administrative support and information services to the insurance industry.
Marketable Securities Prior to January 1, 1994, interest-bearing marketable securities were stated at amortized cost, which approximated market value. Current marketable equity securities are stated at the aggregate of lower of cost or market and a valuation allowance is provided for the excess, if any, of cost over market. The fair values of marketable securities are estimated based on quoted market prices for those or similar investments. Gains or losses on marketable securities are determined on the specific identification method. Investment securities with maturities of three months or less at the time of acquisition are considered cash equivalents. Effective January 1, 1994, the Company adopted the provisions of Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (FAS 115). Pursuant to FAS 115, debt securities included in the Company's investment portfolio for which there is a positive intent and ability to hold to maturity are carried at amortized cost. Debt securities that may be sold prior to maturity and all marketable equity securities are classified as available-for-sale and carried at fair value. 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.
Property and Equipment Property and equipment, including certain equipment acquired under capital leases and support software acquired for internal use, are stated at cost less accumulated depreciation and amortization. Property and equipment are depreciated on a straight-line basis over their estimated useful lives. Assets acquired under capital leases are amortized over the term of the related lease.
Goodwill and Other Acquired Intangible Assets Identifiable intangible assets and goodwill are recorded and amortized over their estimated economic lives or periods of future benefit. The lives established for these assets are a composite of many factors which are subject to change because of the nature of the Company's operations. This is particularly true for goodwill which reflects value attributable to the going concern nature of acquired businesses, the stability of their operations, market presence and reputation. Accordingly, the Company evaluates the continued appropriateness of these lives and recoverability of the carrying value of such assets based upon the latest available economic factors and circumstances. The Company evaluates the recoverability of all long-lived assets including specific intangible assets and goodwill based upon a comparison of discounted estimated future cash flows from the related operations with the then corresponding carrying values of those assets. A rate considered to be commensurate with the risk involved is used to discount the cash flows. Impairment of value, if any, is recognized in the period in which it is determined.
For all years through December 31, 1992, the Company had amortized goodwill over an estimated useful life of 25 years. Effective January 1, 1993, the Company began to amortize goodwill over an estimated life of 15 years for goodwill related to information and computer services company acquisitions and 10 years for goodwill related to software company acquisitions. The Company believes these lives more appropriately reflect the current economic circumstances for such businesses and the related period of future benefit. Longer lives will be used for future business acquisitions only where independent third party studies support such lives.
For all years through December 31, 1992, the Company amortized internally developed software on a straight-line basis over an estimated useful life of four years. Commencing January 1, 1993, the Company began to amortize such software over five years and to-date has used the straight-line method over the remaining estimated useful life.
Income Taxes 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.
In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (FAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company adopted the provisions of this statement for investments held as of and acquired after January 1, 1994 and in accordance with the statement, prior period financial statements have not been restated to reflect the change in accounting principle.
The following is a summary of available-for-sale and held-to- maturity securities included in marketable securities as of December 31, 1994:
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, 1994:
Depreciation and amortization charged to expense was $28.7, $27.2 and $24.1 million for the years ended December 31, 1994, 1993 and 1992, respectively.
December 31, 1994 1993 (In Thousands) Goodwill $ 65,961 $ 76,500 Customer lists 17,984 27,010 Covenants not to compete 2,461 4,956 Other 6,660 3,653 93,066 112,119 Less: Accumulated amortization (15,303) (26,150) $ 77,763 $ 85,969
Goodwill and other intangible assets in the amount of $21.6 million (net of related amortization of $19.3 million) were written off as part of the Company's impairment and restructuring charges (see Note 12). Amortization charged to expense was $8.7, $9.3 and $8.4 million for the years ended December 31, 1994, 1993 and 1992, respectively.
Purchased software in the amount of $11.5 million (net of related amortization of $5.2 million) was written off as part of the Company's impairment and restructuring charges (see Note 12). Amortization charged to expense was $19.8, $22.4 and $20.3 million for the years ended December 31, 1994, 1993 and 1992, respectively.
The Company leases certain data processing and related equipment primarily under operating leases expiring through 1995. Rent expense under operating leases for such equipment was $5.2,
Facilities Year Ending December 31, (In Thousands) 1995.............................. $10,524 1996.............................. 10,189 1997.............................. 6,255 1998.............................. 3,086 1999.............................. 2,421 Thereafter........................ 10,579 Total............................... $43,054
Partly in response to these allegations, the Company conducted its own internal review of its accounting practices and financial statements for the years 1990 through 1993. The Company engaged new independent accountants to review its internal controls and to conduct a special audit of the Company's financial statements covering the year 1992 and the first six months of 1993. The special audit and detailed internal review required several adjustments to the Company's previously reported financial statements. These adjustments are reported in Item 6 of Part II and Note 2 of Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K/A for the year ended December 31, 1993, and resulted in an increase in earnings per share for the year 1992 of 10 cents per share and a $5.1 million increase in retained earnings as of December 31, 1992, as compared to prior publicly reported results. There was no change in annual earnings per share for 1990 or 1991. The Company implemented new control procedures recommended as part of the controls review and expanded its management team.
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 United States Attorney for the District of South Carolina also is conducting an investigation into certain of these matters. The Company is cooperating with these investigations.
course of business. The Company believes it has meritorious defenses and is vigorously defending these matters. While the resolution of these 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.
Year ended December 31, 1994 1993 1992 Provision for taxes at the statutory rate....................... (35.0)% (35.0)% 34.0 %
December 31, 1994 1993 (In Thousands) Current deferred assets: Net operating loss carryforward.................. $ 411 $ 4,315 Other............................................ 6,233 5,176 Current deferred assets.......................... 6,644 9,491 Long-term deferred assets: Impairment and restructuring of operations....... 5,743 12,855 State tax credits................................ 4,945 4,987 Other............................................ 1,765 3,743 Long term deferred assets........................ 12,453 21,585 Total deferred assets............................ $19,097 $31,076
Current deferred liabilities: Other............................................ $ 613 - Current deferred liabilities..................... 613 - Long-term deferred liabilities: Depreciation and amortization of property, equipment and intangibles........................ 12,439 $28,272 Capitalized internal software development costs.. 39,526 32,971 Other............................................ 2,707 12,908 Long-term deferred liabilities................... 54,672 74,151 Total deferred liabilities....................... $55,285 $74,151
On August 10, 1993 the Omnibus Budget Reconciliation Act of 1993 was signed into law. This Act increased the highest marginal federal income tax rate from 34% to 35%. Under the provisions of FAS 109, deferred tax liabilities and assets are adjusted for the effect of a change in tax laws or rates. Furthermore, the effect is included in the income tax provision for the reporting period that includes the enactment date. As such, the net loss for the period ended December 31, 1993 was increased by $1.1 million to reflect the increase in tax rates.
The Company's U.S. income tax returns for the years 1985 through 1990 have been examined by the Internal Revenue Service (IRS). The Company reached a final settlement with the IRS related to all issues in the 1985 through 1990 examinations. As a result of this settlement, the Company paid $3.9 million and reduced its provision for income taxes for the year ended December 31, 1994 by $6.0 million for taxes provided in prior periods.
Profit Sharing Retirement Plan Eligible employees of the Company are covered under the Company's profit sharing retirement plan. The Company's contribution to the plan is determined by the Board of Directors of the Company. Employees make no contributions to this plan. The Company made a contribution of $.8 million in early 1993 for the plan year 1992. No contributions were made for 1994 and 1993.
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 are 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. 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 had been promoted since participating in the plan.
Shares under option exercisable at end of period.............. 878,165 766,805 443,297
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.
The Company has applied its methodology for measuring impairment (see Note 1) by discounting expected future cash flows. In determining its forecasted future results, the Company considered historical financial performance, current and prospective insurance industry environment and market conditions and the long-term opportunities for future growth in the respective businesses. The Company believes that its forecasted future results based on current market conditions and recent historical trends, is the best estimate of the Company's discounted future cash flows.
During 1994, the Company as a result of new events occuring changed its estimates and reduced its restructuring reserves associated with its health insurance systems business, established in June 1993, by $4.4 million, $2.6 million of which resulted from a change in the scheduled downsizing of the Company's health staff and a corresponding reduction in amounts established for severance and outplacement costs and $1.8 million of which resulted from a lease termination at amounts less than those established for the planned future abandonment of certain leased office facilities.
Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash equivalents, marketable securities and trade receivables. The Company places its cash, cash equivalents and marketable securities with high credit quality entities and limits the amount of credit exposure with any one entity. In addition, the Company performs ongoing evaluations of the relative credit standing of these entities, which are considered in the Company's investment strategy.
The results of operations in 1994 reflect special charges recorded in the fourth quarter of $71.9 million (after taxes $44.2 million, or $ 2.27 per share). As a result of the Internal Revenue Service settlement, the Company's 1994 provision for income taxes reflected a $6.0 million reduction of taxes provided in prior periods (see Note 9 in the Notes to the Consolidated Financial Statements).
The results of operations for 1993 reflect special charges of $98.8 million (after taxes, $76.2 million, or $3.29 per share). Special charges recorded for the three months ended June 30, 1993 reflect impairment and restructuring charges related to certain identifiable intangible assets and acquired software of the Company's health insurance systems business of $80.7 million (after taxes $65.0 million, or $2.87 per share). Additionally, the Company recorded charges of $.5 million (after taxes $.3 million, or $.01 per share) and $17.6 million (after taxes $10.9 million, or $.48 per share), for the three months ended March 31, and June 30, 1993, respectively.
For a further discussion of these special charges see Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 12 of Notes to Consolidated Financial Statements.