The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto and "
Insurance Management Solutions Group, Inc. (together with its subsidiaries, the "Company") is a holding company that was incorporated in the State of Florida in December, 1996 by Bankers Insurance Group, Inc. (together with its subsidiaries, "BIG"), which contributed to the Company two of its wholly-owned operating subsidiaries, Insurance Management Solutions, Inc. ("IMS") and Bankers Hazard Determination Services, Inc. ("BHDS"), that were previously formed in August, 1991 and June, 1988, respectively. In July, 1997, the Company acquired a 49% interest in Geotrac, Inc. and, in July, 1998, acquired the remaining 51% interest. Geotrac was subsequently merged into BHDS with the surviving company being known as Geotrac of America, Inc. In January, 1999, the Company acquired Colonial Claims. BIG is a diversified group of P&C insurance companies with premium writings in all fifty states. BIG's principal lines of business include flood, homeowners and automobile insurance lines. From 1996 to 2000, BIG experienced substantial growth in total written premiums from $235 million to $323 million.
Effective January 1, 1998, the Company entered into written service agreements with BIG which 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 the revised fee structure with respect to homeowners claims services. BIG presently accounts for approximately 83% of the Company's outsourcing services revenues and is expected to continue to account for a significant majority of the Company's outsourcing revenues in the foreseeable future.
On April 13, 2001 the Company entered into the Letter Agreement with BIG. Pursuant to the Letter Agreement, the parties agreed to extend the term of each of the service agreements until December 1, 2002. To obtain BIG's agreement to such extensions, the Company, in turn, agreed to certain service fee modifications. Under the service agreements, as amended, BIG will pay the Company (1) a monthly fee based upon direct written premiums for policy administration services relating to its flood, homeowners and commercial lines of business and (2) a monthly fee based upon net claims (after deductibles) for claims administration services relating to its flood line of business. The service fees payable under the service agreements with respect to (a) policy administration services relating to the automobile line of business, and (b) claim administration services relating to all lines of business other than flood, shall remain unchanged. If such amendments to the service agreements had been in effect for the fiscal year ended December 31, 2000, the Company's affiliated outsourcing revenues, which totalled approximately $38 million on an actual basis, would have been approximately $30 million on a pro forma basis. The Company believes that any anticipated reduction in affiliated outsourcing revenues resulting from the implementation of such service fee changes will be largely offset by a corresponding reduction in operating costs as a result of, among other things, the elimination of data and technical support services from the administration services to be provided by the Company to BIG under the service agreements, although no assurances can be given in this regard.
Flood zone determination revenues, which are recognized as services are performed, are cyclically impacted by both changes in mortgage interest rates and trends in home sales.
Management services from Parent were previously charged to the Company under an administration agreement with BIG for common costs that were incurred by BIG. These common costs included human resources, legal, corporate planning and communications, cash management, certain executive management and rent. On April 13, 2001, the Company and BIG entered into the Letter Agreement. Pursuant to the Letter Agreement, the administration agreement was terminated effective April 1, 2001 and will be replaced,
In 1997, the Company's investment in Geotrac was accounted for using the equity method of accounting, since the Company owned less than 50% and had a significant but not controlling influence. In July, 1998, the Company acquired the remaining 51% of Geotrac. As a result, the operations of Geotrac for the year ended December 31, 1998 are consolidated with that of the Company, with the portion of Geotrac's net income allocable to the 51% interest held by the majority stockholder prior to June 30, 1998 reflected as a minority interest.
Outsourcing Services Revenues. Outsourcing services revenues decreased 12.0% to $45.9 million in 2000 from $52.2 million in 1999. The decrease was attributable in part to the fact that revenue generated under an affiliated technical support services arrangement decreased to $0 in 2000 from $1.3 million in 1999. The decrease in outsourcing services revenues also was attributable to the expiration as of December 31, 1999 of
Cost of Flood Zone Determination Services. Cost of flood zone determination services decreased 5.4% to $7.7 million in 2000 from $8.1 million in 1999. As a percentage of flood zone determination services revenues, cost of flood zone determination services increased to 44.9% in 2000 from 42.3% in 1999. The increase resulted primarily from the decrease in the dollar amount of flood zone determination services revenues during 2000 as compared to 1999, partially offset by (i) various production workflow changes made during 1999 that enabled the Company to increase employee productivity and reduce operating expenses,
Management Services from Parent. Management services from Parent decreased 16.4% to $1.9 million in 2000 from $2.3 million in 1999. This decrease was primarily related to the continued assumption by the Company of certain administrative services, including human resources, agency accounting, cash management and legal services, that were previously provided to the Company under the management service agreement with BIG. Such decrease was partially offset by both an increase in rent expense from BIG as a result of an annual rent escalation and an increase in the square footage being leased.
Provision (Benefit) for Income Taxes. The Company's effective income tax rates were 249.8% and 44.2% in 2000 and 1999, respectively. The increase in the effective tax rate during 2000 reflects lower pretax income as well as various non-deductible items, including goodwill recognized in connection with the acquisitions of Geotrac in July, 1998 and Colonial Claims in January, 1999.
Flood Zone Determination Services Revenues. Flood zone determination services revenues decreased 25.5% to $19.2 million in 1999 from $25.7 in 1998. The decrease in flood zone determination services revenues was primarily attributable to increases in interest rates from the corresponding period of the prior year and a resulting decline in loan originations and mortgage refinancings, which fuel the demand for flood zone determinations. Additionally, during 1999, the Company experienced a reduction in flood zone determination revenue from several large customers that are experiencing financial difficulties. The decrease in flood zone determination services revenues in 1999 was partially offset by a novation of the Company's life-of-loan insurance policy in which an estimate of the present value of future losses to be claimed under the policy (approximately $500,000) was paid to the Company in exchange for a release of liability for such future losses under the policy.
Selling General and Administrative Expense. Selling, general and administrative expenses increased 41.5% to $11.9 million in 1999 from $8.4 million in 1998. The increase in selling, general and administrative expenses was primarily attributable to (i) additional wages and related benefits associated with adding executive management, accounting, sales and marketing and other administrative staff to support the Company's expanded operations, (ii) incremental expenses incurred by a direct marketing subsidiary, which was formed in August, 1998, (iii) incremental expenses incurred by Colonial Claims, which was acquired in January, 1999, (iv) and severance costs relating to the resignations of certain officers.
months ended March 31, 1998, was charged to the Company under an arrangement similar to an operating lease and was included in cost of outsourcing services.
Interest Expense. Interest expense decreased 63.1% to $809,000 in 1999 from $2.2 million in 1998. The decrease was primarily related to the early repayment of most of the Company's debt obligations from net proceeds received by the Company from its initial public offering in February, 1999, partially offset by the write-off of deferred financing costs during 1999 as a result of the early repayment of a term loan.
During 2000, the Company's principal sources of liquidity consisted of cash on-hand, cash flows from operations, and available borrowings under the Company's revolving credit facility, which credit facility was terminated in December, 2000, as described below. Prior to 2000, the Company funded its operations through cash generated from operations, receipt of service fees advanced from BIG and available borrowings under the Company's line of credit. Bank borrowings were used to finance fixed asset purchases.
In February, 1999, the Company completed an initial public offering ("IPO") of 3,350,000 shares of Common Stock at a price of $11 per share. Of the 3,350,000 shares sold, 1,350,000 were sold by Venture Capital Corporation (the "Selling Shareholder"), a Cayman Islands company. The offering generated net proceeds to the Company of approximately $19.2 million after deducting offering expenses paid by the Company of approximately $1.3 million. The Company used a portion of the net proceeds from the offering, together with funds received from BIG from proceeds made available to BIG by a subsidiary of the Selling Shareholder, to repay all obligations with BIG and its affiliates. Additionally, the Company used a portion of the IPO proceeds to repay certain debt obligations.
In June, 1999, the Company entered into a revolving line of credit agreement ("LOC)" with a financial institution (the "Bank") that provided for borrowings of up to two times the Company's rolling four quarter earnings before interest, taxes, depreciation and amortization ("EBITDA"), but in no event more than $12.0 million. In December, 2000, the Company received notification from the Bank that it would no longer honor any requests by the Company for advances under the LOC due to the fact that the Bank believed the Company had experienced a material adverse change in its financial condition. To date, the Company has been unable to secure a new LOC upon acceptable terms. Although management continues to seek such an arrangement, no assurances can be given that the Company will be able to secure a new LOC.
On April 13, 2001, the Company entered into a Commitment Letter to advance service fee payments (the "Commitment Letter") with BIG pursuant to which BIG has agreed to advance to the Company up to $1.5 million per month as a prepayment of service fees due by BIG and its affiliates under the Service Agreements. Such advances are available to the Company beginning June 1, 2001 continuing through December 1, 2002 and shall be payable upon demand by the Company. Any funds advanced by BIG to the Company under the Commitment Letter shall constitute a prepayment of, and shall be credited toward, the service fees charged to BIG by the Company during the month following such advance.
Consolidated Statement of Shareholders' Equity for the years ended December 31, 1998, 1999 and 2000.