The Company has the option to renew each of these leases for an additional period.
This facility is subleased from Bankers Financial Corporation, the direct parent corporation of BIG.
In July 1997, the Company acquired a 49% interest in Geotrac, Inc. In July 1998, the Company acquired the remaining 51% interest in Geotrac, Inc., which was subsequently merged into BHDS with the surviving company being known as Geotrac of America, Inc (“Geotrac”). In January 1999, the Company acquired Colonial Claims. On December 28, 2001, the Company sold Geotrac and accordingly, Geotrac’s operations are reflected as discontinued operations herein.
agreements modified the existing arrangements to (i) expand the services provided by the Company to include policy administration for certain automobile lines of business, (ii) recognize claims outsourcing revenue based not on a cost reimbursement basis, but rather on a percentage of earned premiums and, with respect to certain types of claims, a percentage of incurred losses, and (iii) implement a change in fee structure from a percentage of incurred loss to a percentage of earned premiums with respect to homeowners claims services. These changes were negotiated in order to effect more uniform revenue recognition. To obtain BIG’s agreement to such changes, the Company, in turn, agreed to a revised fee structure with respect to homeowners claims services.
Effective January 1, 1999, these Service Agreements were modified to provide for tiered pricing based on the volume of business processed, and to change the fee for data processing services, which was previously charged as a percentage of direct written premiums to a fixed monthly fee. These modifications resulted in a reduction of the base fees charged for certain lines of business and increases in base fees charged for other lines of business to better reflect the service provided and competitive market rates for such services. Effective April 1, 1999, the Company further amended its existing Service Agreements with affiliated insurers to provide for minimum aggregate quarterly service fee payments through December 31, 1999, with respect to certain lines of business; provided that certain key tasks were performed timely. See “Item 13. Certain Relationships and Related Transactions-Service Agreements.”
On April 13, 2001, the Company entered into a Letter Agreement with BIG, BIC, BSIC, and FCIC (the “Letter Agreement”). Pursuant to the Letter Agreement, the Service Agreements were amended effective June 1, 2001 to, among other things, modify certain of the service fees payable thereunder and eliminate data and technical support services from the administrative services to be provided by the Company. If the amendments to the Service Agreements had been in effect for the fiscal year ended December 31, 2000, the Company’s affiliated outsourcing revenues, which totaled approximately $38 million on an actual basis, would have been approximately $30 million on a pro forma basis. See “Item 13. Certain Relationships and Related Transactions-Letter Agreements.”
Under the New Service Agreement, each entity paid the Company as follows: (1) for its policy administration services a monthly fee based upon direct written premiums for the flood, homeowners and automobile insurance programs; (2) for its claims administration services a monthly fee based upon direct earned premiums for the property, casualty, automobile property, automobile casualty and flood insurance programs (in addition, a monthly fee based upon direct incurred losses was charged for flood claims administration and a reimbursement not to exceed 5% of direct incurred losses from a single event in excess of $2 million was charged to property claims.); (3) for its data processing services, a monthly fee based upon direct written premiums for all insurance programs; and (4) for certain customer services such as mailroom, policy assembly, records management and cash office a monthly fee based upon direct written premium (except, if provided in connection with their flood, homeowner and automobile insurance lines, where no such fees were imposed). The New Service Agreement was for an initial term of five years, subject to termination thereafter upon 90 days written notice. The New Service Agreement further provided for the renegotiation of rates in good faith after the first three years of the initial term. See “Item 13. Certain Relationships and Related Transactions-New Service Agreement.”
Agreement”), such that, as of July 1, 2002, the Company no longer provided policy administration or claims processing services for BIG’s personal (i.e., automobile and homeowners) insurance lines of business or claims processing for BIG’s commercial insurance lines of business. However, the Company continued to provide policy administration, claims administration and data processing services in connection with BIG’s flood insurances line of business, with no change in the existing fee structure. (As a result of the transaction consummated between BIG and Fidelity National Financial, Inc. on January 3, 2003, BIG no longer has a flood insurance line of business.) Also effective July 1, 2002, in connection with the foregoing implementation of the Amended New Service Agreement, the Company terminated 98 employees, or approximately 28% of its total workforce. The Company expects to realize savings of approximately $5.1 million in annual payroll costs and related expenses as a result of this reduction in its workforce.
In addition, on January 3, 2003, BIG consummated the sale of FCIC, a subsidiary of BIG and a fifty-state licensed insurance carrier, and certain assets of BIG, including the rights to issue new and renewal flood insurance policies underwritten by BIG and its subsidiaries, Bankers Insurance Company (“BIC”), Bankers Security Insurance Company (“BSIC”) and FCIC, to Fidelity National Financial, Inc. (“FNF”). FNF, a Fortune 500 company, is the largest title insurance and diversified real estate related services company in the United States, with total revenue of nearly $3.9 billion in 2001. The transaction involved more than 300,000 flood insurance policies originated through a nationwide network of approximately 10,000 independent agents in conjunction with the National Flood Insurance Plan.
The FCIC Service Agreement expressly removed FCIC, as a party from the Amended New Service Agreement. Pursuant to the Amended New Service Agreement, however, the Company continues to provide BIG, including its BIC and BSIC subsidiaries, with IT hosting and support services, including cash office processing, records management, policy assembly, and print and mail distribution services, in connection with all of BIG’s personal and commercial insurance lines of business, with no changes in the existing fee structure. Nevertheless, as a result of the consummation of the sale of FCIC and related assets by BIG to FNF, the Company’s reliance on its affiliated customers is expected to diminish significantly on a going-forward basis.
Outsourcing service revenues from fees are principally derived from written and earned insurance premiums and claims incurred.
The preparation of the Company’s consolidated 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 as of the date of the financial statements and revenues and expenses for the respective period-ended for such statements. The determination of estimates requires the use of judgment since future events and their affect on the Company’s operations cannot be determined with absolute certainty. Actual results typically differ from these estimates in some fashion, and at times, these variances may be material to the Company’s financial statements. Management continually evaluates its estimates and assumptions, which are based on historical experience and other factors that are believed to be reasonable under these circumstances. These estimates and the Company’s actual results are subject to the risk factors listed above under “Item 1. Business-Risk Factors.” Nevertheless, management of the Company believes the following items involve a higher degree of complexity and, judgment and therefore, has commented on these items below.
The Company’s allowance for doubtful accounts of $57,000 and $179,000 at December 31, 2001 and 2002, respectively, is based on management’s estimates of the credit- worthiness of its customers, current economic conditions and historical information. In the opinion of management, the Company’s allowance for doubtful accounts is believed to be an amount sufficient to respond to normal business conditions. Historically the level of recorded bad debt expense and write-offs have not been material to the Company’s financial statements. Should business conditions deteriorate or any customer, including BIG, default on it’s obligations to the Company, this allowance may need to be significantly increased, which would have a negative impact upon the Company’s operations.
As of December 31, 2002 and February 28, 2003, respectively, BIG owed the Company an aggregate of approximately $4.9 million and $5.2 million (substantially all of which was overdue) under the Amended New Service Agreement, including approximately $310,000 and $450,000 in late payment fees. The Company has made written demand on BIG for payment in full of all past due amounts owing under the Amended New Service Agreement, and the Audit Committee of the Company’s Board of Directors is currently considering various alternatives for collecting such past due amounts. The Audit Committee and management of the Company believe that no valuation allowance for such past due fees should be recorded at December 31, 2002 based on discussions with management of BIG and analysis of BIG’s ability to make payment for such past due amounts.
On a quarterly basis, management assesses the composition of the Company’s assets and liabilities, as well as the events that have occurred and the circumstances that have changed since the most recent fair value determination. If events occur or circumstances change that would more likely than not reduce the fair value of the related asset or liability below its carrying amount, the related asset or liability would be tested for impairment.
Under SFAS 142, Goodwill and Intangible Assets, the Company retained an independent third-party investment banking firm to conduct an analysis of its goodwill valuation at January 1, 2002. The valuation determined that no impairment of the Company’s goodwill existed as of January 1, 2002. The Company’s internal assessment during 2002 concluded that no impairment existed at December 31, 2002.
The Company evaluates the recoverability of its long-lived assets (principally property and equipment and intangible service contract) whenever circumstances indicate that the carrying amount of an asset may not be recoverable. Factors considered include current operating results, trends, and anticipated undiscounted future cash flows. An impairment loss is recognized to the extent the sum of discounted (using the Company’s incremental borrowing rate) estimated future cash flows (over a period ranging from generally four to ten years) expected to result from the use of the asset is less than the carrying value. Management of the Company believes no impairment existed for any of the periods presented.
The Company makes a number of estimates in the ordinary course of business. Historically, past changes to these estimates have not had a material impact on the Company’s financial condition. However, circumstances could change which would alter future financial information based upon a change in estimated-vs.-actual results.
The Company is subject to various matters of litigation in the ordinary course of business. As the outcome of any litigation is unknown, management estimates the potential amount of liability, if any, in excess of any applicable insurance coverage, based on historical experience and/or the best estimate of the matter at hand. As the outcome of litigation is difficult to predict and significant estimates are made with regard to future events, significant changes in estimated amounts could occur. To date, the Company has not had to pay any legal settlements in excess of existing insurance coverage.
Provision/(Benefit) for Income Taxes. The Company’s effective income tax/(benefit) rates were (30.6%) and 32.4% in 2002 and 2001, respectively. For additional information on the reconciliation of the Company’s effective income tax rate to the federal statutory income tax rate, see “Note 8-Income Taxes” in the “Notes to the Consolidated Financial Statements”.
As a consequence of the sale of Geotrac on December 28, 2001, net income from discontinued operations for 2002 was $0 as compared to $2.4 million for the corresponding period in 2001. For selected financial information on discontinued operations, see “Note 3-Discontinued Operations” in the “Notes to the Consolidated Financial Statements.”
Outsourcing Services Revenues. Outsourcing services revenues increased 21.7% to $57.1 million in 2001 from $46.9 million in 2000. The increase was primarily attributable to the impact of Tropical Storm Allison,
which storm occurred during June 2001. The increase in revenue related to processing for this storm was approximately $12.0 million, including an increase of $2.2 million in Affiliated Revenue and an increase of $9.8 million in Unaffiliated Revenue (of which $7.8 million related to Colonial Claims, the Company’s claims catastrophe subsidiary). Additionally, revenues from the Company’s automobile line of business increased approximately $1.2 million in 2001 as compared to 2000 due principally to significant volume increases in new affiliated business from its non-standard automobile line. The foregoing increases were partially offset by a decrease in revenue from a third-party outsourcing customer for which the Company has only been processing run-off business since the beginning of 2001.
Provision/(Benefits) for Income Taxes. The Company’s effective income tax/(benefit) rates were 32.4% and (25.1%) in 2001 and 2000, respectively. The effective tax/(benefit) rates reflect various non-deductible items, including goodwill recognized in connection with the acquisition of Colonial Claims in January 1999. For additional information on the reconciliation of the Company’s effective income tax rate to the federal statutory income tax rate, see “Note 8-Income Taxes”, in the “Notes to the Consolidated Financial Statements”.
For selected financial information on discontinued operations, see “Note 3.-Discontinued Operations” in the “Notes to Consolidated Financial Statements.”
Income from Discontinued Operations. Income from discontinued operations, net of income tax, increased 41.2% to $2.4 million in 2001 from $1.7 million in 2000 and is comprised of the following:
During the year-ended December 31, 2002, the Company experienced an after-tax loss of $3.0 million and consequently, did not have a positive cash flow from operations during such period. During the year ended December 31, 2002, the Company was substantially dependent on the business of affiliated insurance companies under the common control of BIG, as the Company derived a substantial portion of its revenue from outsourcing services provided to these affiliated insurance companies. During 2002, the Company experienced a reduction in outsourcing services revenue due primarily to continued reduced premium production by BIG and its affiliated insurance companies and the implementation of the Amended New Service Agreement effective July 1, 2002, coupled with a lack of storm-related activity which can often occur during the second and third quarters of each year. The Company, in turn, took several related expense reduction actions to minimize the impact of such reductions in revenue. (See Comparison of the Years Ended December 31, 2002 and 2001-Continuing Operations” above).
On April 13, 2001, the Company entered into a Commitment Letter with BIG pursuant to which BIG agreed to advance to the Company, beginning June 1, 2001, up to $1.5 million per month as a prepayment of service fees due by BIG and its affiliates under their service agreements with the Company. Such advances were available to the Company beginning June 1, 2001 and continuing through December 1, 2002. Any funds advanced by BIG to the Company under the Commitment Letter would have constituted a prepayment of, and would be credited toward, the service fees charged to BIG by the Company during the month following such advance. The Company did not draw upon this advance prior to the termination of the Commitment Letter.
On August 14, 2001, the Company entered into a Credit and Security Agreement with BIG (together with the related loan documentation, the “Original Credit Agreement”), pursuant to which the Company established a short-term, secured line of credit in favor of BIG in the amount of up to $5.0 million (the “Original BIG Loan”). The principal purpose of the Original BIG Loan was to assist with certain short-term working capital needs.
On June 10, 2002, the Company received payment in full of all amounts due and owing (approximately $5.0 million) from BIG, under the Original BIG Loan.
On January 3, 2003, at the time of consummation of the sale by BIG of FCIC and certain other assets to FNF, the Company received payment in full of all amounts due and owing (approximately $6.7 million) from BIG under the Line of Credit. The Line of Credit was secured by a first priority lien security interest in the book of flood insurance business sold by BIG to FNF. This security interest and all loan documentation relating to the Line of Credit was terminated upon receipt by the Company of all amounts due under the Line of Credit.
The following financial statements of the Company and its independent certified public accountants’ report are set forth on pages through of this Report:
Consolidated Statement of Shareholders’ Equity for the years ended December 31, 2000, 2001 and 2002